Australia: New leadership, old challenges

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Australia: New leadership, old challenges

Australia: New leadership, old challenges

Asia Pacific Economic Outlook, January 2014

The third quarter for Australia was politically eventful, but less so economically. The country is rethinking its reliance on mineral exports and looking to diversify into other avenues for growth.

Aussie_spotThe third quarter proved a mixed bag for Australia—eventful politically, but less so on the economic front. The September elections brought to power the Liberal-National coalition under the leadership of Tony Abbott. September also brought to a close another quarter of disappointment for the economy. Growth slowed as domestic and international demand remained downbeat, and the central bank’s outlook for the rest of the year only added to the gloom. Meanwhile, amid cooling global commodity prices, Australia is rethinking its substantial reliance on mineral exports and looking to diversify into other avenues for growth. On the whole, the new government has its work cut out and not a moment to lose.

Lackluster growth, with a sharp recovery unlikely

The news for Australia in the third quarter was disheartening, as year-over-year growth came in at 2.3 percent, which was slower than in Q2 2013. Quarter-on-quarter growth of 0.6 percent also lagged that of the previous quarter. Economic activity has been weighed down by sluggish consumption (figure 1), which grew a modest 1.8 percent year over year, while investments fell 1.2 percent. Exports expanded a robust 6.1 percent year over year, but this was still slower than the growth rate of Q2. Sector-wise, losses in manufacturing and utilities partially offset gains in mining and services to limit growth. Manufacturing and utilities shrank 1.9 percent and 4.6 percent respectively, even as mining expanded 7.7 percent and services grew approximately 2.7 percent.

Figure 1

Prospects for the rest of year are not promising either. While private consumption is expected to remain subdued, government expenditure and investments are likely to decelerate sharply compared with the previous year. Furthermore, cooling demand from major trade partners, especially China, could affect exports. As a result, in August the Reserve Bank of Australia (RBA) lowered its growth forecast for the year ending December 2013 to 2.25 percent from the 2.50 percent previously projected.

Consumer spending worrisome, but RBA’s options limited

Accounting for more than half the country’s GDP, private consumption is the backbone of the Australian economy. However, of late this segment has also been a major source of concern. Year-over-year growth in consumer spending has lost pace markedly in the past three quarters, averaging just 1.7 percent, the lowest since late 2009. Several factors are constraining private consumption, including weak labor market conditions (figure 2) and high debt levels. Unemployment rates have gone up since early 2011 and in Q3 2013 averaged 5.7 percent—a level last seen four years ago. Even more concerning is the declining labor participation rate, which has been slipping since late 2010 and averaged 65 percent in Q3 2013, the lowest in more than six years. Dull economic conditions have limited employment opportunities and discouraged job seekers. Meanwhile, households are burdened with high levels of debt (approximately 148 percent of disposable income), which are also likely curtailing spending.

Dull economic conditions have limited employment opportunities and discouraged job seekers.

Figure 2

To spur economic activity, the RBA has brought the benchmark interest rate to a historic low of 2.5 percent by cutting rates twice in 2013, by a total of 50 basis points. However, overall growth and spending remain tepid. Even the Australian dollar remains “uncomfortably high” by the RBA’s own admission,1 hampering exports (figure 3).

Figure 3

At the same time, further monetary easing is not expected in the next few months, amid concerns over rapidly rising house prices (figure 4). The house price index across Australia’s eight capital cities for Q3 2013 has grown 7.6 percent compared with Q3 2012, and jumped 21.6 percent over the past five years. Limited supply and investor demand have pushed up house prices despite the weak economy, giving rise to fears of a housing bubble. In response, the RBA held rates steady at its latest meeting in December 2013.

Australia Figure 4

Economic diversification on the agenda

As global demand cools, it is driving down commodity prices and adversely affecting growth in Australia. Growth halved to 2.3 percent year over year in Q3 2013 compared with Q1 2012, as commodity prices slid 5.5 percent over the same period (figure 5).

Australia Figure 5

This is driving the country to reconsider its dependence on mineral exports and related investments, and plan for diversifying its economic activities. Currently mining accounts for 10 percent of the GDP, up from 7 percent in 1980, but over the same period manufacturing has halved to 7 percent from 14 percent, and agriculture has stagnated below 3 percent (figure 6).

Australia Figure 6

Manufacturing and agriculture are both areas of focus for the new government, which during elections had pledged to turn the north of Australia into a major exporter of food products—a “food bowl” for Asia. The government plans to give Australian agriculture a leg up, including increasing research funding and speeding up free-trade agreement negotiations with Asian countries such as China, India, and Indonesia. To boost manufacturing, the government promises to do away with red tape, lower the tax burden, offer an accommodative regulatory environment, and provide monetary support. In keeping with its promises, in November 2013 the government introduced a bill to repeal a controversial law related to carbon emission taxes.

However, these are early days for the new government, and its success in reviving and diversifying the economy remains to be seen.

Endnotes

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  1. Reserve Bank of Australia, “Statement by Glenn Stevens, governor: Monetary policy decision” (media release), December 3, 2013.

About The Author

Navya Kumar

Navya Kumar is an economist and an assistant manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, January 2014: Australia
Illustrations by Jessica McCourt (Cover), Stephanie Dalton Cowan (Australia)