Sydney – Start with a question: which of the large developed economies seems to be growing fastest through this global downturn? The answer is Australia.
Sydney – Start with a question: which of the large developed economies seems to be growing fastest through this global downturn? The answer is Australia. It is followed by Canada, the US and the UK. This leads to another question: why is it that English-speaking countries seem to be pulling clear of the pack?
The latter question is enormously important, for if the English-speaking world has a real lead on the rest, then this will have a profound impact on economic policy – and power – in the coming years. If, on the other hand, we have been deluding ourselves by living on borrowed money and time, then we are in for some nasty surprises.
A brief visit to Australia has suggested to me some admittedly tentative answers. The Aussie story is fascinating because of the parallels with other anglophone countries. As in the US and UK, demand has been supported by consumers, whose enthusiasm has in turn been supported by a strong housing market.
However, unlike the US and UK – but like Canada – Australia has also benefited economically from a relatively weak currency. Like Canada, it feels to the visitor very good value. Unsurprisingly, Sydney is full of Japanese tourists. The sheer physical oomph of the place – at a price which is roughly half that of Tokyo – is a powerful draw. But the big source of demand is domestic and supported by house prices.
As a whole, house prices are up 17 per cent year-on-year, with hotspots like Sydney and Brisbane up by 23 per cent and 26 per cent respectively. This pattern is very similar to the UK. The Australian Prudential Regulation Authority, fearful that the bubble might get out of control, recently asked building societies to review their lending practices and reminded banks that they should be conservative in their risk management.
Still, despite the potential impact of a house price crash, forecasts for growth next year remain pretty good, with business investment and exports taking over from any slackening of domestic consumption. The new OECD projections for both this year and next are shown in the left-hand graph above. Not only is Australia on top this year but it is also expected to be top next year, actually improving a bit.
The Australian government thinks these figures are too good and is projecting growth of about 3 per cent for 2002/3. It has warned that the OECD has not made sufficient allowance for damage caused by the current drought. Meanwhile Brian Redican, senior economist at Macquarie Bank, expects growth of 2.75 per cent. But even that would be extremely good by world standards. People here fret about the global downturn, and some industries, such as tourism, are suffering. In relative terms, though, the country is performing exceptionally well. So what is Australia doing right?
I think the general answer is that, like the other anglophone economies, it has the anchor of consumers who like living well, economic governance that is prepared to allow such demand to show through in a current account deficit, and policies that attract inward investment to cover that deficit. In the case of Australia, the current account deficit is 3 per cent of GDP, which compares with some 4 per cent in the US and 2 per cent in the UK.
A current account deficit is the inevitable counterpart of a capital account surplus. That inflow of capital increases the potential growth rate, which in the case of Australia is probably more than 3 per cent a year. So a virtuous circle is secured.
There is a further factor here: Australia, like the US, is a country of immigrants. The latest UN projections for population growth in a selected group of countries are shown in the second graph. Australia is expected more or less to match the US, adding nearly 40 per cent to its population over the next half century. (You can see why it is concerned about uncontrolled immigration, by the way, by noting the projection for nearby Indonesia.) Countries that increase their population will inevitably grow faster because an expanding population requires investment in housing and the infrastructure to cope with this.
Such growth does not necessarily show in rising income per head. Australia has slipped down the wealth league, from being one of the two or three richest countries in the world a century ago to being, on paper if not in reality, poorer than the UK now. But growth does allow countries to make mistakes and keep moving forward. Built too many houses? OK, wait a bit and a growing population will mop them up. Over-invested in infrastructure? Ditto.
There is a cushion here that countries that will lose population – like Germany, Italy and Japan – do not have.
This leads to a more general point. It is hard to pin down but there is an openness, an acceptance of change, an acceptance indeed of migration, that characterises the English-speaking world and seems to give it some sort of buffer against hard times. You catch this self-confidence in Australia at the moment. It has, sadly, been savaged by the blow of the Bali bombings, the effect of which continues to reverberate here. But there is a feeling that things will be all right in the end that is also evident in North America and, to a certain extent, in the UK.
It would be silly not to admit that there is a danger here. The relative economic success of the English-speaking world is sustained by current account deficits and personal borrowings. Neither form of borrowing can be sustained for ever. But it is hard not to look at those growth figures and acknowledge that we are all lucky – and Australians especially so.Reuse content