Satyajit Das: After the Ashes, Australia finds itself on a sticky economic wicket

Economics View: Despite recent falls, the ability to devalue the Australian dollar remains limited

Australia’s cricketing stocks are at a low after losses to India (4-0) and England (3-0). And Australia’s new conservative Liberal National Party government also faces a country with diminished prospects, as its stellar economic run seems to have come to an end.

First, Australia’s enviably consistent economic growth, low unemployment and rising living standards were driven by strong growth in emerging nations, especially China and India, and demand for commodities. But China and India are slowing: even if growth levels remain above those in developed markets, the changing composition of growth (a rebalancing from investment to consumption) means that resource use intensity will decrease, reducing demand for commodities. Increased capacity, as a result of aggressive recent investment, will also come on-stream progressively, coinciding with lower demand putting pressure on prices and volumes.

Second, the commodity boom, Australia’s role as an investment proxy for China, AAA-rated safe haven status and relatively higher interest rates have all increased the value of the Australian dollar, reducing the country’s competitiveness in manufacturing, retail, tourism and exports.

Third, since 2001, Australia’s trade account has been weak despite the mining boom and record terms of trade. Australia’s current account deficit of around 3 to 4 per cent of GDP is likely to widen, increasing reliance on international financing.

Fourth, public finances, both national and state, are deteriorating as strong growth in the commodity sector no longer offsets weak domestic conditions. Significant budget deficits are likely.

Fifth, the Australian banking system, while well capitalised, has a very high level of exposure to the domestic economy and the housing market, which is over-valued by most measures. A fall in prices, increases in unemployment and decreases in income could expose financial system vulnerabilities.

Sixth, Australia’s cost structure is high, exacerbated by the high currency. Australian minimum wages are around A$16 (£9.40) per hour, compared to around A$7-8 per hour in the US and A$1-2 per hour in China. The cost of Australian engineers is around A$170 per hour, compared to A$132 in the US. Cash costs in the mining sector have increased by more than 250 per cent in the last 10 years. Improvements in productivity have been lacklustre.

Seventh, policy attempts to rebalance the economy have had limited success. Australia’s central bank, the Reserve Bank of Australia has lowered interest rates to 2.50 per cent per annum, seeking to boost housing and consumption activity as well as reducing the value of the Australian dollar. Lower rates to date have had limited impact on housing, credit growth, consumption, non-commodity investment, employment and confidence.

Despite recent falls, the ability to devalue the Australian dollar remains limited, with major economies implementing quantitative easing programmes. Given the country is an importer of manufactured products, a lower currency will also increase prices, lowering purchasing power.

Eighth, Australia’s attempt to rebalance toward Asia is flawed. As the commodity and mining boom slows, Australia wants to sell food, education, healthcare and financial services to Asia, as well as attract Asian tourists. But Asia faces its own challenges. Australia’s Asian strategy also suffers from inherent contradictions between its political and defence partnership with the US and its economic dependence on Asia. Deep-seated cultural barriers, such as the “White Australia” policy which ended only in the 1960s, are ignored.

The mining boom helped maintain income and buying power, as Australia extracted large rewards for its mineral resources, covering up the lack of international competitiveness in many sectors, which was driven by high costs, poor productivity performance, declining educational achievements and a narrow industrial base. Australia may have substantially wasted the proceeds of its mineral boom.

The author Donald Horne called Australia the “lucky country”. In a fragile and challenging international environment, Australia’s new government will need to make difficult choices and to have more than the usual quotient of luck.

Australia’s cricketers have the opportunity to make a start on the long road to recovery when England tour later this year. The economic recovery is likely to take much longer.

Satyajit Das is a former banker and author of “Extreme Money” and “Traders, Guns & Money”

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions