Following up his recent warnings that Australia faces a sharp drop in living standards as the mining boom unwinds, Professor Ross Garnaut has delivered another sobering assessment, claiming that Australia faces “dog days” of faltering incomes and living standards as the Chinese economy slows.
From the AFR today:
…the “salad days” of the boom were rapidly becoming “dog days” of faltering incomes and living standards in Australia…“We do have to recognise that we’re in for fairly tough times”…
He said Australia’s terms of trade, or income from exports, would be hit by three “mutually reinforcing negatives” under way in China.
The first was a shift in China’s economy away from a focus on heavy industrial investment and exports, which have driven metals and energy demand. The second was a wave of internal reforms including the move towards lower carbon emissions that would cruel demand for Australian thermal coal. The third was the current “cyclical” downturn that was likely to continue.
“It’s an accident they’re coming all at once, but they are,” Professor Garnaut said, adding that China’s leaders showed no signs of wanting to repeat the post-GFC stimulus boost that helped turbocharge Australia’s terms of trade from 2009 to 2011…
“The challenge for us is that when the terms of trade were very high, we lifted our living standards up to the limit . . . and we didn’t leave ourselves much margin” for the subsequent fall, Professor Garnaut said…
“We have to go through a long period of expenditure restraint” that could last “half a dozen years or more”, he said, referring to future government spending.
Garnaut then recommends a series of tax reforms, including unwinding the generous tax concessions provided to older wealthy Australians, as well as a new round of economic reform and “shared sacrifices”.
The easy gains alluded to be Garnaut was the once-in-a-century terms-of-trade boom that ran from 2003 to 2011, which was caused by surging commodity prices – particularly iron ore and coal (roughly 40% of Australia’s merchandise exports (see below chart).
The rising price received for Australia’s exports essentially granted the nation a pay rise, allowing a given level of exports to buy more imports. As a result, the growth in average incomes was turbocharged, as illustrated in the next chart, which shows per capita national disposable income growing much faster than the growth in what we produce – per capita GDP:
In fact, analysis released in July by the Australian Treasury showed that around half of the growth of average incomes experienced over the 2000s was caused by the one-off rise in the terms-of-trade:
In August, McKinsey Global went one step further releasing a report showing that 90% of the growth in Australian incomes in the seven years to 2012 was caused by the mining boom – via the rising terms-of-trade and the boom in mining-related investment (see below charts).
As alluded to by Garnaut, the terms-of-trade is a double edged sword. As the Chinese economy slows and/or shifts towards a less resource-intensive, consumer-led economy, commodity prices will fall. In turn, Australia’s terms-of-trade will contract, dragging on incomes, jobs, and taxation revenues across Australia. Billions of dollars worth of planned mining-related capital investments are also at risk of being mothballed, placing further downward pressure on economic growth, jobs and incomes.
Ultimately, the only way for Australia to maintain its high standards of living is to drastically improve productivity. And with the population also ageing rapidly, which will drastically reduce the ratio of workers to non-workers, raising productivity will become even more paramount.
Garnaut is exactly right. Unfortunately, Australia’s leaders have shown that they are not up to the job. Australia desperately needs another Hawke/Keating-style of Government that acknowledges the challenges facing Australia, articulates these to the Australian people, and governs for the long-term good of the nation. Relying on good luck will no longer cut it.
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
