Australia’s economy after COVID-19

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.