Australia's economy is now in its 24th year of continuous expansion, but a growing number of analysts believe its prospects of reaching a quarter century of unbroken prosperity are in jeopardy. Weaker mining investment, tumbling iron ore prices, slow jobs growth, lackluster production numbers and an intractable political dispute over the fiscal deficit all seem to support a gloomy prognosis that Australia's decade-long mining-led boom is over. When the reckoning is presented, some local economists and visiting commentators warn, Australians will be shocked by grim reality.
The bad news comes at an awkward time for Australia's political leaders, who are preparing to host a summit of leaders of the Group of 20 major global economies in Brisbane in November. Their authority to speak on global economic issues depends not on Australia's size but on its record run of well-managed prosperity. Australia wants each leader to sign up to policy changes intended to add an extra 2% to each country's output over five years. If the Australian economy is itself fading, other leaders might well suggest that Australia minds its own business, and lets others mind theirs.
Facts and fiction Down Under
The truth, however, is that the Australian economic story is both more interesting and more nuanced than the widely reported view that the so-called lucky country is spiraling into a slump after the supposedly fat and complacent years of the mining boom.
For one thing, the mining boom in Australia has not been as big or as enriching as many reports suggest. For another, it is not over. And Australians have not wasted it -- on the contrary, they have largely saved it. The reality of the last decade in Australia bears very little resemblance to the appearance.
For example, despite the international celebrity of Australia's mining boom, the economy actually performed rather better before the boom began than it has since. Growth figures for gross domestic product, incomes, and export volumes were all stronger or much the same in the decade before the explosion of iron ore prices in 2003 than they were in the 10 years that followed. Even mining production grew at much the same pace in the earlier 10 years as in the latter. At the end of the first decade of the boom, mining as a share of GDP was the same as it was at the start.
And while it is true that the rise in mining investment has been very big, the resource sector as a whole, including mining output, metals refining, and all the intermediate products used in those activities, grew very much less in the first 10 years of the boom than is often supposed. My calculations show that the resource sector expanded by about 3% of GDP, comparing 2012 with 2002. That is big -- but not all that big.
The gain to Australian income from the boom is also a little less than is widely imagined. This is in part because most of the mining industry's added value is profits rather than wages, while four-fifths of the industry is foreign owned. My calculations indicate that the gain to Australians' income from higher mining exports was about 3% of GDP before adjusting for inflation, comparing 2012 to 2002. Again, this is useful, but not dazzling.
Nor is the boom over. It is true that the investment boom has crested and will decline sharply over the next few years, but the production phase of the boom has a lot longer to run. Only in the last few years has mining output begun to expand substantially faster than GDP (increasing its share of GDP from 9% two years ago to 11% today). The value of mining exports continues to rise despite lower prices. There is much more to come, particularly from exports of liquefied natural gas. The LNG plants now under construction will not begin exporting for another two or three years.
It is often said that Australians wasted the boom, and it is true that from 2003 to 2007 Australian governments used swelling company tax revenues to provide what have proved to be unsustainable cuts in personal income tax. That is the main reason why the Australian government has a fiscal deficit, despite 23 years of prosperity. Corporate income tax growth has slowed, and personal income tax is well below its average share of GDP over the past couple of decades.
But Australians saved the equivalent of the tax cuts, and more. All up, Australian savings as a share of GDP have risen by roughly the same amount as the additional income produced by higher mining exports -- about 3% of GDP. Almost all the gain is in household saving. And while they were saving more, Australians have also invested more, studied more and worked more. Since the boom began, Australia's capital stock (excluding housing) has increased in volume by nearly two-thirds.
So the boom was not as big as is widely thought; it has on the whole been sensibly handled; and in any case it is not yet over. But Australia does face two big economic challenges. One is to find sources of growth to replace mining investment, which is certainly slowing. The other is to adjust to lower commodity prices and a lower Australian dollar.
Mining investment is now 8% of GDP compared with 2% a decade ago. There is little doubt that it is headed back down to 2% or 3%, in three or four years' time. But half of the goods and services -- trucks, LNG platforms, machinery -- used in mining investment are imported. So the problem for the Australian economy is to find extra sources of growth over the next three years or so that add up to around 3% of GDP.
Some of those new growth drivers are already apparent. Mining exports have a lot further to rise. Housing construction, slow since 2002, is expanding on the back of low interest rates, rising house prices, low vacancy rates and rapid population growth. There are signs that business investment outside mining is picking up, having been feeble in recent years. Government-sponsored infrastructure investment will make a contribution, though probably not a big one. Household consumption, which always accounts for well over half of overall spending, is currently growing a little more slowly than GDP as a whole, and has room to pick up a little more. Tourism arrivals hit a new high late last year, and continue at a strong pace despite the strength of the Australian dollar. Foreign student numbers are rising, boosting income for colleges and universities. Adjusting to the decline of mining investment will be bumpy, and occasionally scary, but by no means impossible.
Adjusting to lower commodity prices will also be painful. Coal is down substantially, as well as iron ore. But production increases are offsetting the price decline to a large extent. In the year to July, for example, Australian iron ore export revenues hit a record high of just under 100 billion Australian dollars ($89.5 billion). The value of coal exports was higher in the year to July than in the previous year. The value of all mining and processed metals exports in the year to June reached a new record, and was 15% higher than the year before.
The Australian dollar is likely to continue its recent downward trend against other currencies, particularly the U.S. dollar. But if that happens, export industries, including services such as education, will become more competitive, helping export volumes to rise further. It is true that a weaker Australian dollar would make imports dearer in local currency terms, and to that extent consumers would be worse off. It is also true that wages are growing quite slowly, and that employment growth is slower than the growth of the labor force. But output growth overall remains around its 3% trend, labor productivity has grown at well above its trend rate for the last three years, and some of the early indicators of jobs growth have strengthened in recent months. If Australia manages this major adjustment to falling mining investment, falling commodity prices and a falling Australian dollar with nothing worse than a period of very slow wages growth, it will have done well.
Whether or not Australia will succeed in moving from the mining investment boom to more diverse sources of growth will not be clear when the G-20 leaders gather in Brisbane in November. But other leaders are unlikely to be very critical. While the U.S. and the U.K. economies are a bit stronger, Japan's growth has been checked by its consumption tax increase, and German economy has slowed. At the same time, the performance of the developing economies is less than stellar. China's growth is still rapid, but markedly lower than it was a few years ago, India is dawdling, and both Brazil and Turkey, two of the star emerging economies, have slowed. After repeated downgrades to the global growth outlook by the International Monetary Fund and the Organization for Economic Cooperation and Development, Australia's performance still looks comparatively reasonable.
John Edwards is a member of the board of the Reserve Bank of Australia and a Visiting Fellow at the Lowy Institute. His latest publication is the Penguin Special/Lowy Institute Paper, "Beyond the Boom." The views expressed here are his own.