Satchelnomics: The unpredictable nature of Australia's economy

Satchelnomics: The unpredictable economy
Black Knight Mushrooms, supplying wholesale fruit and vegetables from Ballina to Brisbane, based in Chinderah, NSW.
"You've got to ac-cent-tchu-ate the positive, eliminate the negative, and latch on to the affirmative, don't mess with Mister In-Between," go the lyrics to Johnny Mercer's song, sung by the likes of Bing Crosby, The Andrews Sisters, Artie Shaw and Aretha Franklin and composed by Harold Allen circa 1944, near the end of the second World War. 

The lesson described is the one learned by Jonah in the Whale and Noah in the Ark "when everything looked so dark". Don't grope around when pandemonium abounds, look for the light and it'll be alright, they were sayin'... just don't mess with Mister In-Between.

In our "two-speed economy", there is much talk of doom and reason to be cautious – to resist the urge to be overtly proud of our relative prosperity and admit that there are far too many variables at play (weather, the European economies, environment, political instability) to guarantee that we will be fiscally safe and sound.

For his part, Dean Wagemaker from family-owned business Black Knight Mushrooms is wearing the uncertainty well. "We've not been too much affected by the Carbon Tax in pricing of fruit and veggies," he says, "unless you start to worry about the cost of cool rooms and what not. Coolant is expensive to replace."

We, the "Lucky Country", are the Great In-Between, stuck on the one hand between a boom in mining and downturn in manufacturing, and on the other between key investment partners China and America, both who want supremacy in their Australian dealings. It's been a long time since we looked to the Mother Country for economic assurance.

"Given our unique value proposition as a strong economy with a top shelf balance sheet, sitting in the fastest growing region in the world, it's no surprise that global investors are lining up to invest here in Australia," said an optimistic Treasurer Wayne Swan (to the tune of a Bruce Springsteen song) during his widely reported and derided (of course!) John Button lecture.

To which international business players were heard to say, in that true Australian way, 'Tell him he's dreaming!'. Buffered by good economic policy of year's past (the devaluation of the dollar, easing of monetary policy) and the commodities boom, the politics are off-putting prudent investment.

"Global CEOs wary of Australia" declared the front-page of Wednesday's Australian Financial Review, pointing to the reluctance of international companies to pull up stumps on our shores due to the high costs of doing business, the carbon pricing effect, mining tax confusion, surging labour costs, company tax rates, the high dollar and political short-termism ahead of next year's election.

By Thursday it had all got a bit confusing. Now the Americans are staking their claim. Now the Chinese are staking their's (cottin' picking enterprise are in the Chinese sights). But is the Chinese economy hitting rocky territory? Ah, headache! We are going on strike! Call the union!

Speaking of which, looking inward, there are signs of our somewhat stagnant levels of productivity. The Economist's Intelligence Unit ranked Australia's economic performance behind 33 other countries, and our overall operating environment 8th overall, taking special note of our "stuttering productivity performance".

The sentiment was reiterated this week. "A landmark report by McKinsey & Co warns that stalling productivity is a threat to Australia's run of more than 20 years of economic growth and that it has been camouflaged by China's voracious appetite for our coal and ore," reported The Australian – bastion of national big business interests.

"The report finds that labour productivity has been growing at a lacklustre 0.3 per cent a year since 2005, in stark contrast to the 'golden age' of the 1990s when it was growing at 3.1 per cent, at the same time that wage inflation [4.4 per cent per year] has been significant. And the resources sector has been hit by higher costs and delays on mammoth projects."

The report says we are leaning a little too heavily on the commodities boom, leaving the economy vulnerable to growth slowdown in China, volatility in global resources markets and the normalisation of resource prices when supply catches up with demand.

"The Australian economic formula has switched from being productivity-led to being boom dependent," McKinsey principal Chris Bradley told The Australian. "A return to healthy productivity performance will be needed to ensure growth continues beyond the boom."

Risky business, it is, throwing all of our eggs into the boom basket and sending it down the proverbial Nile to China, without thinking about laying some good eggs right here. In making our industries more competitive, innovative, efficient and diversified, and encouraging your average Aussie to earn, invest and spend wisely; to be proactive about the nation's economy.

But with a Federal Election scheduled for next year, it's almost a case of 'Shhh, everyone close their eyes and pretend that outcome isn't possible, we're having such a good time of it! Let's try to keep everyone happy!'. Populism and popular policy reign supreme, pandering to our self-interests, but also to our compassion (NDIS). 

While Aussie business interests are busy dismantling rumours that the Chinese are taking over the country (Chinese investment here is dwarfed by American and Canadian interests), The Guardian paints the global picture in a single headline in its weekly edition: 'Global economy hits the wall'.

In his analysis, Larry Elliott writes: "...since the start of 2012 there have been unmistakable signs that economic problems are not confined to Europe, North America and Japan. India has slowing growth and high inflation; Russia's industrial weakness has been masked by a high oil price; Brazil has felt the backwash from weak growth in the US; and China's export-led model has started to falter... Globalisation of production has meant not just interconnectedness but interdependency. China's big export markets are Europe, which has been in the throes of a sovereign debt crisis, and the US, experiencing sub-par recovery by historic standards." 

Of course, basic economics would suggest slower demand means less export opportunities; a cooling off in China and India, together with deceleration of activity in other Asian nations (Singapore, Japan), means that the great Asian Century might not be all it's cracked up to be. Writing for New Matilda recently in 'What if the Boom Goes Bust?' Ben Eltham asks, "what would happen if commodities declined sharply, and the mining sector contracted?"

Certainly, there would be pain in regional Australia. But there would also be counter-balancing benefits across the economy. The Australian dollar would fall, making exports more competitive generally. This would help businesses that export, as well as those that compete with imports. Wayne Swan might not get the mining tax bounty he hopes for. But there would be benefits that would accrue to Australia generally, as our economy rebalanced away from mining and back towards more mundane goods and services.

As we have seen with the Euro Crisis, and the Asian Financial Crisis of 1987 and 1997/98, and the Great Depression of 1929 (at which time, I might add, Arlen composed "Get Happy"), economic markets are no respecter of borders or persons or time. We might do well to remember that 'miracle' economies, as the Asian economies were viewed prior to 1997, are not always what they appear to be.

"I think it is unusual how many different forces there are acting on the economy at the moment," ANZ Bank's chief economist Ivan Colhoun told the ABC this week. " The size of those forces are really, really big at the moment and you think about the massive divergence, the very high Australian dollar, the sovereign debt issue in Europe, the internet, the ageing of the population, the mining boom, some of the tax changes. Those are all really, really long-term structural changes so it is quite unusual how big they are and how long-lasting they're going to be."

While we have survived and even thrived amid global financial instability, including the more recent GFC, we need to think smart about a sustainable future built on the back of sound investment decisions and economic diversity; not playing too heavily to our strengths (resources) at the expense of innovation - in policy, in education, in other industries, in encouraging Aussies to see the value in adding to the nation's overall productivity.

According to the Productivity Commission’s Dean Parham, there were three main drivers of the doubling rate of Australian productivity growth in the 1990s: 50 per cent was due to us having a more open economy, 30 per cent to more research and development, and 20 percent to the information technology revolution.

Today, two major productivity challenges for Australia are to keep our economy open to the world, and to boost the quality of our education system to produce smarter workers who will populate the service industries, like healthcare, which are set to become the biggest employer as the nation gets older. 

Currently, while some industries and sections of society are having a whale of a time, others are not. What we have on our hands is a multi-speed economy in which some labour markets, states, regions and sectors are performing strongly, while others limp along.

"Boom times a big boost for Queensland's farms", shouts a headline from today's Courier Mail. The story describes the good times being enjoyed by Queensland grain growers who are looking at big returns "thanks to devastating drought in prime US and Russian wheat-growing areas". Abundance!

But while the resource-rich states Western Australia and Queensland benefit from selling their commodities, trade-exposed states like Victoria (home to the manufacturing sector) and Tasmania suffer under the burden of a high Australian dollar, weaker global demand and competitive pressures. Australia is an expensive place to do business.

As noted by the Federal Treasurer Wayne Swan in the John Button lecture, "The choices you make in slicing the economic pie reflect fundamental moral judgements. They also reflect important economic judgements, because, economically divided societies tend to be societies without common purpose, without cohesion, without cooperation, and eventually without economic growth."

If the goal is not a settled matter, we falter. And this is where Australia's current political climate is a hindrance. The very nature of how we create wealth and distribute wealth has been hijacked by popularity polls. Some policy has bipartisan support, but the Labor/Greens and Liberal/Nationals are at odds over the Mining Tax and Carbon Tax and industrial relations and spending and investing.

Investment in sport and the National Disability Insurance Scheme, as well as the divisive discourse around global warming, foreign investment, mining, manufacturing, cattle exports, coal seam gas, foreign aid and settling asylum seekers on Nauru, have given us further incentive to ask, "Are we spending and making money wisely?", as the Global Financial Crisis lingers on.

What good does it do a nation to gain buckets of money but lose its soul?

All in all, most of us can expect that in our lives there will be both times of prosperity (boom!) and times of (relative) poverty (bust!), calling on us to make hay while the sun shines, save our pennies for a rainy day and not put all our eggs in one basket (that's three cliches!). We might also do well to put some money and thought toward folks in need, because one day we might need the "charity".

We do, and should, have a say in how we will go on to survive, and whether or not we will thrive, and what kind of society we will be; the living standards enjoyed by you and me, wherever we might be on the personal wealth and earnings spectrum. How we spend, save, invest or give our money says a great deal about what kind of nation (or individual) we are or want to be.

First we must think: what is the goal of a national economy? To make its rich richer (capitalism), to eliminate economic disparity (socialism), to protect our assets and living status (protectionism) or to responsibly manage what we have (our wealth, resources, skills) to benefit the most people with the view to increasing the nation's overall capital and filtering its monetary goodness throughout the world?

This is not necessarily about raising living standards, as are some are prone to see fit. Though those Australians who tread the poverty line need the means and assistance to rise above their circumstances, as World Vision's Tim Costello notes, 'the more we have, the less we enjoy'.

Cost-of-living is often conflated with cost-of-lifestyle, but money does not happiness make and the more you have the more you have to lose, unless, like Bill Gates, and generous Australian philanthropists, you are wired to give a hoot, as apposed to a harsh kick-up-the-bum boot along in life's school of hard knocks.

Wasn't it nice to see all those prominent Aussies in The Australian this week doing good things for Indigenous literacy at the Books and Mortar working bee in Aurukun, Cape York, in full and glorious view of the nation's media, and in support of Noel Person's Cape York Partnerships?

"We do have a program (at Rio) to help indigenous people get work-ready, for safety as much as anything, but obviously it's better for everyone if all kids come out of school able to read and write," said Rio Tinto managing director David Peever.

And this amidst a federal funding review of education nationwide, and as BlueScope Steel CEO Paul O'Malley become the latest executive to opt for a pay freeze and forgo a bonus (along with Rio's Tom Albanese and BHP Billiton CEO Marius Kloppers). BlueScope is set to record a $1 billion loss for 2011-12; it has culled 1000 jobs.

There is a degree of market correction taking place right under our noses. The big ideological argument now (for economists have turned the social science into a religion) is about expending ourselves in the way a "fit and proper" nation of the developed world should. It's about wise financial, environmental and workforce (read: people!) stewardship, and making the most of what we have in a topsy-turvy world of uncertainty.

As Johnny Mercer says, "You've got to spread joy up to the maximum; bring gloom down to the minimum; Have faith or pandemonium's liable to walk upon the scene."

- Economists forecast rates rise as economy rebounds, ABC News, 14 August, 2012
- Coal Seam Gas - Economic Bonanza or Environmental Disaster? ABC Big Ideas, 13 August, 2012
- What if the boom goes bust?, Ben Eltham, New Matilda, 31 July, 2012
- Andrew Leigh: A Brief Economic History Of Australia, 18 May, 2012
- The Changing Structure of the Australian Economy and Monetary Policy, Philip Lowe, Deputy Governor, Address to the Australian Industry Group 12th Annual Economic Forum, 7 March 2012
- Uncertain times for the economy and your super, Ben Eltham, The Drum, 23 January, 2012
- Australian Jobs 2012, Australian Government
- Breaking the Sheep’s Back: A review of the Australian wool industry and government intervention, Mark S. Lawson, OnLine Opinion, 22 August, 2011
- The minefield of a second mining boom, Ben Eltham, The Drum, 24 May, 2011
- Mining Booms and the Australian Economy, Ric Battellino, RBA Deputy Governor, Address to The Sydney Institute
- The East Asian Economic Crisis: A brief overview of the facts, the issues and the future, Mark Beeson and Andrew Rosser, Working Paper, June 1998

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