After successfully navigating the global downturn, Australia is now struggling to grow. The economy has decelerated due to slow domestic demand, and political uncertainty is adding to the challenges.
Australia, having successfully navigated the global downturn in 2008–09, is now struggling to grow. The economy has decelerated due to a marked slowdown in domestic demand, with robust export growth the only silver lining. However, as global energy and metal prices are expected to cool in the next few quarters, prospects for this major commodity exporter are unlikely to improve significantly in the short term. Also, Australia’s efforts to diversify beyond commodity exports are hobbled by declining manufacturing competitiveness. Political uncertainties are compounding the country’s many challenges.
Lackluster domestic demand slowing down growth
In Q1 2013, Australia’s GDP grew 2.5 percent year over year, the slowest since mid-2011. The deceleration was driven by sluggish private and government consumption growth and a decline in investments. Private consumption grew 2.0 percent year over year, the slowest in two years, due to a weak labor market. Australia’s unemployment has remained above 5.0 percent since mid-2011 and reached 5.5 percent in May 2013, even as underemployment has persisted in excess of 7.0 percent for four years. Meanwhile, government consumption increased just 0.5 percent year over year, again the smallest expansion in two years. A persisting fiscal deficit is forcing the government to limit expenditure in areas such as education and health care. In addition, gross fixed investments are down 0.2 percent year over year, due to lower expenditure on equipment by private businesses and the winding down of public investment, which were a part of stimulus measures.
To counter slowing growth, the Reserve Bank of Australia (RBA) cut its key interest rate by 25 basis points to 2.75 percent in May 2013. However, credit demand is expected to stay moderate this year, as households struggle with debt levels at 148 percent of their income, and business sentiments remain cautious. Reflecting muted business sentiments, the June 2013 manufacturing purchasing managers’ index stood at 49.6. As a result, the RBA is likely to cut rates again in Q3 2013 and capitalize on the low inflation. Inflation was 2.5 percent in Q1 2013, within the RBA’s target range of 2.0–3.0 percent. Overall, GDP growth for 2013 is expected to slow down to 2.9–3.0 percent, compared to 3.6 percent in 2012.
Strong export performance in Q1 2013; however, challenges lie ahead
Australian exports rose 8.1 percent year over year in Q1 2013, buoyed by robust growth in the exports of metal ores and food products. Also, imports declined 3.2 percent year over year in the first quarter, as slowing investments in the mining sector reduced equipment demand. As a result, the current-account deficit fell sharply to AUD 8.5 billion in Q1 2013, compared to deficits in excess of AUD 14.0 billion in both Q1 2012 and Q4 2012.
Australian exports rose 8.1 percent year over year in Q1 2013, buoyed by robust growth in the exports of metal ores and food products.
However, exports are projected to lose pace in the next few quarters, due to declining global commodity prices and lower demand from a slowing Chinese economy. World energy (oil, gas, and coal) prices are forecast to fall 4.1 percent year over year in 2013, while world metal prices could deteriorate 2.9 percent. In addition, Australia is expected to ramp up imports in the remainder of the year, due to the demand for capital goods picking up in the mining sector. As a result, the country’s current-account balance for 2013 (3.3 percent of GDP) may not be a substantial improvement over last year (3.7 percent of GDP).
Furthermore, falling commodity prices are estimated to lower Australia’s terms of trade by 10 percent in 2013–14. This could in turn hit corporate profitability and therefore corporate tax revenue for the government. As a result, the government revised its budget balance forecasts in May 2013, stating that deficits would persist in 2013–14, compared to the surpluses projected earlier.
The risk of long-term decline in manufacturing competitiveness
While the extraction sector has been Australia’s major focus, the country is losing competitiveness in manufacturing. Firms in the manufacturing sector in Australia are struggling with high costs of labor and energy, as well as relatively lower economies of scale than their counterparts in countries such as the United States and Germany. Australia ranks the third highest globally in hourly direct pay in manufacturing. In addition, electricity costs for manufacturers have grown rapidly, and are currently 78 percent higher than five years ago. Under these circumstances, manufacturing saw a 1.0 percent job loss, a 16.4 percent dip in operating profits, and a 0.4 percent lower value addition in 2011–12. This compares with a 1.8 percent addition in jobs, a 5.0 percent improvement in operating profits, and a 7.3 percent higher value addition for Australia’s industry overall in 2011–12.
Political uncertainties weighing on business sentiments
Internal politics in the ruling Labor Party resulted in Kevin Rudd replacing Julia Gillard as prime minister in June 2013, just about three months before the elections. As a result, several ministerial portfolios will change; even the election dates may now be altered. In fact, an even larger change is expected in the elections, with the Labor Party projected to be defeated by the opposition Liberal-National coalition. However, the return of Rudd could improve the Labor Party’s chances. He seems to strike a chord with the public, given his frank opinion of the struggling economy and previous experience in handling a crisis, such as during the global downturn of 2008–09. Rudd has also been highlighting the opposition’s conservative fiscal stance, portraying it as detrimental to growth in a scenario of weakening GDP growth. Overall, it will be interesting to witness the final outcome of the Australian elections, which will hopefully bring some certainty for businesses.