11 November 2007

Australia’s Current Boom: Boon or Bane?

Melvin Watts looks at an economy rarely mentioned in economic news nowadays.


Australia is booming. Its business cycle yields a continuous upswing, including full employment (with an unemployment rate around 4 percent). The persisting high demand for human capital has enticed the government to recruit migrant labourers. Companies have been vigorously investing. Having benefited from high revenues the government has run a budget surplus since FY 2005/06, which was the first time for more than three decades. In order to further stimulate the already high consumption behaviour of private households, it has initiated a generous tax cut in May 2007. In the face of the stable boom, economists have forecasted a growth of 3.3 percent for 2008.

One of Australia’s core businesses pertains to mining and commodity production, which form about 6 percent of the national income. The service sector however, which generates 80 percent of the national income, is closely geared with the former: Those benefiting from the booming exports of raw materials encompass subcontractors of both mining firms and building enterprises, shipping companies, and architecture firms. The Australian financial market, which provides financial experts for investments in mineral resources, is regarded as a hub of global commodity trade. Mining giants such as BHP Billiton and Rio Tinto invest several million to develop new ore, gold, or nickel deposits.

Economists regard Australia’s ongoing performance not only as a result of the booming commodity trade but also as a result of far-reaching economic reforms that were implemented since the 1980s, transforming the country to a liberal national economy. According to these reforms, the government deregulated the financial market and lowered the customs tariff, leading to currency import and a stimulation of foreign trade. Besides, roads and highways, as well as airports and power suppliers were privatised and the value added tax was adopted at coeval abatement of the income tax. Government influence was reduced, while individual responsibility was stipulated. Previous year the government disempowered the labour unions; collective labour agreements were substituted by workplace agreements according to which the employers negotiate with their employees individually. Also, the dismissal protection for firms with up until 100 employees was abolished. After initial protests against these new rules people finally accepted the more flexible labour market in the face of low unemployment. Job advertisements have increased by 36 percent compared to previous year.

Despite the boom however, Australia has other worries to cope with: the increasing indebtedness of both, private households and firms. More and more Australians buy now and pay later. On average, every holder of a credit card has debited his account with 3000 Australian dollars. At the same time, the cost pressure increases, considering the privatised educational and health care system, as well as child care, or tolls for highways and tunnels. Apparently, the whole country is on the nod. For decades, imports used to exceed exports, leading to a high deficit of the trade balance. Since the financial market was opened, Australia increasingly borrowed more money from abroad than it earned by itself, while firms strongly financed themselves by more favourable foreign debt. Economists fear now that either a possible shock in the form of economic slump occurring in either of its important trade partners, China and Japan, or a recurrence of an international financial crisis could make Australia abruptly run short of liquidity. Moreover, the country is highly dependent on Asia’s excessive demand for raw materials. The agriculture is sagging after six years of drought; also, the manufacturing industry hardly contributes to economic growth. The trade balance is expected to improve this year only due to the increasing exports of commodities. Therefore, some Australians already talk about a commodity curse.

--Melvin Watts


References:

Downwonder. (March 29, 2007). The Economist. Retrieved on: 18 October 2007 on http://www.economist.com/

Sprothen, V. (August 28, 2007). Boom auf Pump. Wirtschaftswoche, pp.36-38)

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