A two-speed economy

Chris Pritchard

Mining exports have sustained Australian economic growth throughout the international financial crisis, but other key sectors – including tourism – have stagnated, due in part to the strong local dollar.

Red dust billows from deep gashes scarring the Australian outback’s remotest regions, a reminder that mining powers this country’s economy. 

Much of the world regards the Australian economy as robust but an introspective view down under is altogether more cautious. The Australian government, however, downplays such doubts. According to Federal Treasurer (treasurers are equivalent to some countries’ finance ministers) Wayne Swan, Australians should remember that “our economic credentials are among the strongest in the developed world and Australia has a proven track record of dealing with global economic uncertainly”. 

Key economic indicators support the view that the economy is doing relatively well: in the year to mid-2010 (the latest for which official GDP statistics are available), GDP grew by 3.3 percent; year-on-year inflation is currently running at 3.6 percent; the Australian dollar is relatively strong; and unemployment is at a modest 4.9 percent (with some industries even having difficulty finding staff). Banks have remained far healthier than those in many other parts of the world, with a surge in savings – money that otherwise would have flowed to retailers. 

Nevertheless, there is nervousness on the home front. Economist Ross Gittins believes that Australia may be talking itself into recession. “It’s a question of whether increasingly negative perceptions can overwhelm the reality that our economy has a mighty lot going for it,” he observes. As Michael Issenberg, chairman and chief operating officer of Accor Asia Pacific, Australia’s largest hotel company, suggests, Australia is in a “confidence lull”. He maintains that pessimism is widespread but argues this is only a temporary phenomenon. 

The term ‘two-speed economy’ is often used to describe the Australian condition. It refers to mining – and the rest. Export-driven mining thrives, anchored by two states: Western Australia and Queensland. But what about other components of the economy? 

The real estate sector is ailing and recent news from retail has been negative. A major department store chain, David Jones, says its next reported profits will be lower than expected. Premier Investments, which owns popular fashion outlets such as Just Jeans and Portmans, also downgraded profits and announced it will close loss-making stores. The Woolworths supermarket chain describes these as “challenging” times, while one large chain of bookshops has shuttered all its outlets. 

Industry analysts assert consumers are nervous and have, in effect, gone on strike. According to this argument, younger consumers – who had never experienced economic hard times until the global financial crisis (GFC) – are spearheading national reluctance to open wallets. 

Two other factors add to retailers’ woes: the growth in online shopping, with buyers lured by lower prices and an ability to avoid goods-and-services taxes; and surging numbers of Australians, taking advantage of a buoyant local currency, holidaying overseas and spending their money abroad. In June alone, according to the Australian Bureau of Statistics, there were 656,700 short-term departures from Australia compared to 595,700 in 2009 and only 508,200 the year before that. 

Out in the nation’s west, however, a more bullish mood survives. Scant attention is paid to the worries obsessing the eastern states – mining is widely viewed as the key to national well-being. Iron ore is the most economically important product exported from mineral-rich Australia. Much of it goes to China, the country’s number-one export market, which takes 21.81 percent of exports. 

Critics of the country’s dependence on mining contend that Australia has too many eggs in the Chinese basket and should increase diversification. Australia, they say, is no more than a Chinese quarry and greater effort should be made to add value through partial processing – rather than merely shipping what is dug from the ground. 

It’s sometimes said that Australian analysts spend as much time studying China’s economy as they do their own. And why not? After all, if China sneezes, Australia catches a cold. If global demand for Chinese made consumer goods decreases because of economic hard times, China’s need for Australian minerals will lessen. A contrary argument concedes that, thanks to China and prudent management, Australia’s economy ticked along better than most during the GFC. Those holding this view accept that Chinese orders declined during the economic crisis, making Australian companies nervous (with consequent cuts in business travel and staff numbers). However, they also note that China quickly rebounded and suggest the Asian nation, even if forced to concentrate more on a burgeoning domestic market, will still need Australian raw materials. It’s because of China, say those subscribing to this view, that the GFC was a mild shower in Australia compared to the violent storm unleashed in many other parts of the world. 

Mining companies – along with other branches of industry – complain strongly that a proposed carbon emissions tax will hit exports and make Australian goods less affordable. The government fiercely opposes this view, campaigning in favour of the tax (which opinion polls indicate is widely opposed). Prime Minister Julia Gillard maintains Asia’s economic dynamism means Australia can afford to put a price on carbon while Europe and the USA face prolonged economic uncertainty. “We’re located in the right part of the world at the right time,” says Gillard. 

Aside from mining sector exports (mainly iron ore, coal, alumina, gold and diamonds), Australia is also a major source of wheat, wool and meat (lamb and beef). A trend in recent years has been growth of the services sector. Two rapidly expanding Australian industries have stalled in the past two years, largely because the country is perceived as increasingly expensive: inbound tourism – which has been particularly worrying in tropical Queensland where it’s a major industry – and education. 

Foreign fee-paying students, mostly from Asia, have become critical to the cash flow of major Australian universities. But Rod Jones, chief executive of Navitas – a company placing students in overseas universities – confirms Australia is hurting, with Canada the major winner. “Canada is an enormous beneficiary of students turning away from Australia and Britain,” he says. He blames tightened visa policies in Australia and the UK and, in Australia’s case, a stronger local dollar. 

Nonetheless, gloom isn’t justified, maintains Treasurer Wayne Swan, who predictably talks up the economy. He’s confident there’ll be a rebound, viewing downturns as temporary events exacerbated by domestic floods and cyclones as well as events overseas to which Australia can adjust. 

However, even the country’s top banker concedes that the nervousness is real. “Will the good old days for consumption growth of the 1995-2005 period be seen again?” asks Glenn Stevens, governor of the Reserve Bank of Australia. “I don’t think they can be, at least not if this growth depends on spending growth outpacing growth in income and leverage increasing over a lengthy period.” He refers to the “cautious consumer” and urges greater productivity, suggesting the mining boom masks a dramatic downshift in consumer spending. 

For the moment, however, Australia’s leaders seem content to let mining’s strong performance carry the economy.

About the author:

Chris Pritchard is a journalist based in Sydney


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