Australia’s economy after COVID-19

Once the coronavirus disaster ends or wanes, Australia will face difficult economic times for many years because of its growing debt, a reality that will demand greater policy innovation.     

With recent government spending exploding in response to the coronavirus to assist the unemployed and businesses, it is estimated that Australia's net public debt will rise to around 26% of gross domestic product (GDP) by 30 June 2020 after being around 19.5% at the end of 2019. Who knows how large the public debt will be by the end of 2020-21.

While the current use of quantitative easing around the world is intended to “keep bond yields perpetually low”, thus adding to global total debt (private and public) which reached 322% of total economic output in the third quarter of 2019 ($US253 trillion), it would be nonsense for Australia to endlessly print more money to produce goods and services to aid the recovery.  

Already, S&P Global Ratings has downgraded Australia’s outlook from stable to negative in response to the Morrison government’s massive financial stimulus package.

But, Australia needs to do more to diversify its economy.

For a start, we should no longer rely on authoritarian China to the same extent for our economic salvation.

Hence, I question the view that Australia should expand its economic relationship with China to counter rising anti-globalisation protectionism where the US is “pushing hard with rhetoric geared towards the economic decoupling of the US from China”.

I also reject the plea from the same authors that the government should “rethink our foreign investment rules as they apply to mainland China” to “look rationally at the new opportunities” to cooperate with Beijing on new technologies and research and development.

While the ANU’s Allan Gyngell urges Australia to “engage effectively in direct high-level discussions with both Beijing and Washington, or risk being crippled in its recovery”, the US will rightfully expect Australia to support the promotion of liberalism in political and economic terms, even if this offends authoritarian China.   

As noted by Grant Newsham, a former US diplomat and research fellow at the Japan Forum for Strategic Studies, Australia will continue to enjoy US support as long as the vast majority of Australian politicians and people take the Chinese threat seriously and do not succumb to merely taking Chinese money.

As for Australia’s economic plight, problems were evident before the coronavirus given that  economic growth had slowed to under 2% in the first three quarters of 2019 before finishing the year at 2.2%. Only strong population growth has masked Australia’s very low per capita economic growth rates with the ten year period from 2009 to 2018 exceeding 2% only once. 

In fact, talk of the Australian government selling bonds was evident during October 2019 when Goldman Sachs noted that the Reserve Banks of Australia (RBA) could resort to $200 billion bond-buying scheme if rate cuts (then 0.75%) did not lift stimulate economic growth and increase inflation to the 2-3% range.

The importance of housing to the Australian economy, which led the RBA during May 2019 to project two further interest rate cuts over the next few years in response to Australia’s brief housing market downturn, also resulted in the Morrison government announcing another first home buyers’ scheme while acting as guarantor on deposits for those who had not saved enough given that banks now required 20% of the purchase price to insure the loan.

So just how will the Australian economy prosper after the coronavirus disaster given that many businesses may be lost and debt will need to be repaid with possible repayment options including a GST increase, higher land tax, raising the Medicare levy, and the inclusion of owner-occupied housing in the asset test for the age pension.

In terms of creating wealth, however, can we revitalise manufacturing or do Western economies continue to allow authoritarian China to increasingly dominate global manufacturing given that its share of global manufacturing output has already climbed from 8.7 percent in 2004 to 28.4 percent in 2018.

While Western based manufacturers comply much more with various health, safety, employment, and environmental regulations, Chinese based manufacturers continue to take advantage of the latter’s formidable “business ecosystem” and lack of regulatory compliance, not to mention competitive currency practices. This includes the use of child and involuntary labor, poor health and safety norms, and a lack of adequate environmental protection laws.

Despite the average salary in China being $887 per month in 2018, Chinese companies are still able to utilise cheap labour from its population of 1.4 billion with Shanghai’s minimum hourly rate by January 2020 still only $US3.16 per hour in Shanghai and $US2.91 in Shenzhen.  

While Western companies also take advantage of China’s supply chain efficiencies to keep costs low and margins high, Western societies have to decide whether or not to revitalise their own manufacturing industries given their own economic difficulties and the reality that freer trade is mostly benefiting authoritarian China.

The simple truth is that Australia’s economic boom since the early 1990s to the GFC was not just the result of substantial economic reform since the early 1980s, albeit Australia’s economy since was  aided by a floating exchange rate, greater labour market flexibility and financial system reform.

From the 1990s until the mid- 2000s, Australia experienced average housing price inflation of 7.2% in nominal terms at a time when the inflation target was 2 to 3 per cent per annum. This development was enabled by the deregulation of the financial sector during the 1980s and the shift to a low inflation and low interest rate environment in the early 1990s which greatly increased household access to finance.

Australian exporters also benefited from the US real estate boom, which reached a peak of 8.9% of GDP in 2006, fuelled by easy credit and unsustainable debt for many home buyers, a trend that boosted demand for Chinese electronics, apparel, and other goods. Subsequently, Chinese exports was a major contributor to the US trade deficit which rose greatly from the early 1990s to reach a peak of 5% of GDP in 2006 before declining to 3% by 2018.

With growing Australian real estate prices also creating wealth, with 42% of Australia’s average net household wealth of around $1 million (2017-18) coming from the family home and 15% from investment properties, this boosted personal consumption. Measured in 2004–05 prices, household final consumption expenditure per capita, which rose 152% from $10,400 in 1960–61 to $26,100 in 2005–06, was particularly strong between 1992–93 and 2005–06 when growing by 2.6% per year compared to 1.9% a year between 1960–61 and 1992–93.

In more recent years, Australia’s reliance upon debt has dwarfed economic growth. Between 2010-11 and 2018-19, Australia’s GDP increased from $1.32 trillion to $1.88 trillion, yet the national debt (public, corporate and private) rose from $4.4 trillion to slightly over $8 trillion. This calculates to $6.40 of debt generating $1 of economic activity, and continues a growing trend since the early 1990s.

Given the limitations of any economy relying debt and rising house prices forever, a return to the market economy that existed prior to the coronavirus disaster may be a recipe for economic mediocrity in the future.  

While the Morrison government now expressessentiment that Australia needs to restore its critical manufacturing sector somewhat so it is never again exposed to shortages in medical supplies such as personal protective equipment, is this enough?

Or, to put it another way, how realistic is it for Australia to once again have a much larger manufacturing sector, which has reduced from around 30% of Australian GDP in the early 1960s to 5.7% in 2018?

We could revitalise our manufacturing sector at a time when cheaper robotics is diminishing the impact of high labour costs to boost domestic production of goods rather than import them, albeit such production may mean that industrial robots outnumber the number of production workers.

The McKinsey Global Institute notes that higher-wage nations will get a greater productivity boost from robotics than lower-wage nations, even though installing such technologies will be less expensive in lower income nations. This is because a US company would recoup the added cost of a $US250,000 robotic investment within one year when replacing two workers given that annual total compensation for the average US manufacturing worker is $US72,000, compared to over eight years in Mexico where workers cost $US14,000, and 30 years for the Philippines at $4,200 per person.   

At present, China is again leading the way with its Robotics Industry Development Plan aiming to expand robot use tenfold by 2025. For example, Guangdong province is reported to be investing around $US135 billion. In 2017, around 75% of robot sales were concentrated in China, Korea, Germany, Japan, and the US.

Of course, revitalising manufacturing is no easy task, as the Trump Administration found out with its tariff war with China given that manufacturing comprised just 11% of US GDP in the second quarter of 2019, the smallest share of the economy of data going back to 1947 and far behind the near 25% level of the 1960s.

If we are to promote manufacturing, input cost factors must also be considered, a reality that would help all industries.

In the case of energy costs, given there are real concerns about global warming with insurance costs already rising, do we advocate a boom in renewable energy infrastructure to utilise our own minerals and create jobs rather than ship them overseas to be turned into metals, or do we also consider the latest and safest versions of nuclear energy? 

In terms of wages, while I support a decent minimum wage, I would agree that penalty rates should be streamlined further, perhaps to a maximum of 150% for overtime and work outside of normal hours. I currently get a 250% pay rate for working on public holidays.       

If we don’t boost our manufacturing sector, we may find it extremely hard to create enough jobs, and the necessary wealth to pay for a decent welfare system?

Already there is a strong argument for much more public housing given more and more Australians are struggling with rent and will retire without owning a home, while the cost of Australia’s public health sector is becoming more expensive with out-of-pocket costs rising as productivity growth in the healthcare sector tends to be lower than the rest of the economy.

No policy issue is beyond the need for extensive debate, at a time when developed western nations face “a sustained period of sub optimal growth checked by both excessive leverage and an ageing population”.  

If high youth unemployment persists and grows, do we again establish National Service or something similar for any unemployed 18-22?

With regard to taxation, can we impose a turnover tax on global corporations who often pay no tax. The Australian Tax Office reported that of 2,214 entities (1,197 foreign-owned) examined for the 2017-18 period, 710 still paid no tax despite tougher anti-avoidance laws. For example, Google and Facebook pay less than $40 million in tax as much revenue is still channelled via low-tax countries like Singapore.

Do we really need to pay senior public servants so much pay?

Do we really need to fund the ABC and elite sport so extensively?

Why not fund elite sport (and stadium refurbishments) through a national lottery as the UK does.

Do we attach ties to foreign aid which can deliver benefit to both the recipient country and Australia, say through investment in local manufacturing production which can build wealth in the recipient country and provide cheaper manufacturing products for our country, rather than rely upon China for just about everything.

Do we spend billions on water infrastructure to deliver water to Australia’s dry interior to help food production and help water proof vulnerable communities?  

Do we again examine superannuation tax breaks and the fairness of franking credits?

Should Australian governments utilise an extremely low interest rate environment, predicted in 2018 to last for the next 20 years, to borrow and improve important physical structures that aid society and economic expansion such as roads, bridges, ports, public transport, and sewer systems?

Do we draw upon the Future Fund and Industry and Retail Super Funds (worth around $2 trillion in long term capital)?

In the end, however, government must take the lead and help revive Australia in order to create greater per capita wealth rather than rely on factors such as exports to China and high levels of immigration.  

If we don’t act soon to diversify our economy, our best days in terms of having a very high standard of living (and reasonable societal equity) may be confined to the pages of history.