A Brief Background
Australia is a free-market democracy that hasn’t experienced a recession in 25 years. Although it was, and still remains, an agricultural and resource based economy. The growth in the services sector, in direct investment and employment has added a much needed balance to the GDP mix. Because of a Nett increase in immigration over the last decade, the Australian workforce is multi-cultural, skilled and tech savvy. To a large extent this has driven the increase in the services sector.
Government debt has risen since the 2009 financial crisis, fuelled largely by stimulus spending by the previous Labour government. However, Australia still remains one of the wealthiest countries in the Asia-Pacific region. China remains Australia’s principal trading partner, although mineral exports have bottomed out due to the slow-down in the Chinese economy.
Government spending has remained fairly constant at 37% of GDP over the last three years, and the budget deficit is also constant at 2.8% of GDP.
Trade still remains of prime importance to the Australian economy. Traditionally, Australia has conducted most of its trade with the US and the UK. However, trade with China has continued to grow in importance and today China is Australia’s biggest trading partner, when combining both imports and exports.
Australia is the biggest exporter of wool and lead in the world, and the fifth biggest producer of gold. Wheat, sugar, and zinc continue to remain major Australian exports.
The effect of US elections
With the election of Donald Trump as US president, the US stock market has rallied in a rather spectacular way. The US dollar has also strengthened. This is good news for Australian exports, but unfortunately bad for imports. The general consensus is that President Trump will boost the American economy with tax cuts, both corporate and personal, as well as increase infrastructure spending.
The resultant growth in the US economy will force the American Reserve Bank to raise interest rates. In fact last night the US Federal Reserve increased rates for the third time in 6 months taking them to the highest point since 2008. This could present difficulties to countries like Australia that depend on direct foreign investment. There are also grave concerns over rumours of changes to US trade relations with trade partners. And, make no mistake, even though China has become Australia’s major trading partner, America still remains a vital component of Australia’s trading mix.
China has become Australia’s biggest trading partner and it stands to reason that whatever happens in China will affect the Australian economy. China’s economic slow-down, and the subsequent slowing of demand for commodities, has impacted heavily on the Australian resource based economy. All, however, is not doom and gloom for commodities. The Chinese economy is not expected to contract spectacularly in the immediate future, and with the slow recovery of the global economy, in particular America; the prospects for commodities will be bound to improve over the near term.
Pundits have been warning for a long time that the Australia market is overheated, and is due for a major correction soon. Overall housing prices have risen 12.9% in the last year, and house prices in Sydney have risen 20% over the same time period. This has resulted in lower income investors seeing the housing boom as a way to increase disposable income by investing in rental property.
Unfortunately, this has increased the level of indebtedness in these households. This has created a highly volatile situation. Should the housing market take a serious down-turn, these households would be hard put to cope, resulting in a ripple effect throughout the economy. The construction industry has experienced a resultant slow-down, and many feel that it will not be re-ignited without stimulus spending in the form of infrastructure spend by the government.
Australia shed 50,000 full time jobs in 2016 and the overall increase in jobs available for the same period was 80,000. This can be explained by the number of people who have stopped looking for work and the number of part time hours, as opposed to full time jobs, that have been added.
If GDP growth for the year continues at 2.5 to 2.7%, as predicted; unemployment will likely increase slightly over the coming year. Australia’s visa and immigration policies have helped to moderate demographic disparities, even though there has been a nett increase in immigration over the last few years.
Despite this rather gloomy outlook the Australian workforce remains skilled, tech savvy, multi-cultural and flexible enough to weather the storm. This flexibility, coupled with the growth in the services sector has managed to absorb a fair number of lost jobs from the mining and construction sectors.
Even though the level of private investment has remained sluggish, the Australian economy, although far from world markets, has still managed to be fully integrated into the global economy. A highly skilled, flexible workforce, the growth in exports in the services sector, as well as a growing emphasis on the Asia-Pacific region, will stand Australia in good stead in the near future. Australia remains a stable, well run, well-regulated and sophisticated economy that is not likely to see any huge economic upheavals in the near future, and retains an attractive climate for foreign investors and Australians to do business.