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
The Queen and the letter sent to Charlie
Arts and Entertainment
Eurovision Song Contest 2015
EurovisionGoogle marks the 2015 show
Two lesbians hold hands at a gay pride parade.
peopleIrish journalist shares moving story on day of referendum
Arts and Entertainment
<b>Kathryn Williams</b>
When I was supporting Ray La Montagne I was six months pregnant. He had been touring for a year and he was exhausted and full of the cold. I was feeling motherly, so I would leave presents for him and his band: Tunnock's Tea Cakes, cold remedies and proper tea. Ray seemed painfully shy. He hardly spoke, hardly looked at you in the face. I felt like a dick speaking to him, but said "hi" every day. </p>
He was being courted by the same record company who had signed me and subsequently let me go, and I wanted him to know that there were people around who didn't want anything from him. At the Shepherds Bush Empire in London, on the last night of the tour, Ray stopped in his set to thank me for doing the support. He said I was a really good songwriter and people should buy my stuff. I was taken aback and felt emotionally overwhelmed. Later that year, just before I had my boy Louis, I was l asleep in bed with Radio 4 on when Louis moved around in my belly and woke me up. Ray was doing a session on the World Service. </p>
I really believe that Louis recognised the music from the tour, and when I gave birth to him at home I played Ray's record as something that he would recognise to come into the world with. </p>
booksKathryn Williams explores the works and influences of Sylvia Plath
Liz Kendall played a key role in the introduction of the smoking ban
newsLiz Kendall: profile
Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?