A shifting global economy brings Australia to a crossroads

November 29, 2013

Australia is no longer immune to the stagnation in the West. Despite a resilient housing market, Australia’s economy is slowing. With a worsening labor market, consumption is eroding, along with business confidence.

In the past two years, the benchmark interest rate has been almost halved to 2.5 percent. Still, Australia’s real GDP growth is likely to decrease to 2.4 percent during the ongoing year and will remain barely 2 percent until the mid-2010s.

Australia is at a new crossroads.

In the past decade or so, exported commodities fueled Australia’s terms of trade, thanks to rising commodity prices. While agriculture and natural resources each account for barely 3-5 percent of GDP respectively, they contribute substantially to export performance. True, the service sector of the economy, including tourism, education, and financial services, continues to account for some 70 percent of GDP. However, the country’s abundant and diverse natural resources attract substantial foreign investment.

Before the global financial crisis, the Australian economy grew for 17 consecutive years. As export-led growth collapsed worldwide, then-Prime Minister Kevin Rudd’s Labor government introduced a US$50 billion fiscal stimulus package to offset the effect of the slowing world economy, while the Reserve Bank of Australia (RBA) cut interest rates to historic lows. Further, China’s 2009 stimulus package sustained demand for commodities from Australia.

Except for just one quarter of negative growth, Australia actually grew by 1.4 percent in 2009. Last year, growth amounted to 3.3 percent, whereas unemployment was 5.2 percent. However, despite past efforts to refocus on increasing economic productivity, Australia’s growth has been driven somewhat narrowly by a mining investment boom, which has rendered the economy more vulnerable to trade shocks.

In the past decade, iron ore, coal, gold and natural gas have been Australia’s major commodities, but new industries are gradually coming to the fore. These opportunities comprise food manufacturing, oil and gas extraction, beer manufacturing, education services and legal services.

The short-term picture is bright, but medium-term erosion is the new reality.

The erosion of growth is amplifying pressures between and within both major parties. In mid-October, the Occupy Sydney movement protested in front of the central bank. Barely a month later, Prime Minister Tony Abbott’s business advisor Maurice Newman criticized the Labor government’s “class warfare particularly aimed at business,” healthcare programs for Australians with disabilities, the proposed reforms to school funding, too-high wages and too-rigid industrial relations.

Today, Australia is one of the world’s wealthiest nations, second to Switzerland in average wealth and the richest in terms of median wealth, according to the Credit Suisse 2013 Global Wealth Report. But it is also the eighth most unequal country among the OECD club. In the coming years, the long-held Australian dream of “fair go” is likely to erode further — particularly in view of the deepening internal divisions of the center-left Labor Party, ever since the premierships of Bob Hawke and Paul Keating.

Recently, former Prime Minister Kevin Rudd bid an emotional farewell to politics. After he first took the office in 2007, infighting in the Labor Party caused him to lose the post to Julia Gillard in 2010. Last June, he reclaimed his post, which helped the Labor Party gain back some of the ground it had lost under Gillard, but not enough to beat Abbott. In the process, Rudd used strong-arm political tactics and compromised his positions — e.g. emissions trading scheme, mining tax — that contributed to popular disillusionment.

In September elections, Tony Abbott led the center-right Liberal/National Coalition to victory. That very same day he ordered the ending of the carbon tax and the halting of asylum-seeker boats. For months, Abbott has promised to prune government expenditure and cut taxes domestically, while arguing that Australia’s “foreign policy should have Jakarta rather than a Geneva focus.”

Over recent decades, Australia’s foreign relations have been driven by a close association with Washington, but also by a desire to develop relationships with Asia and the Pacific. The former is driven by security objectives, the latter by economic needs.

In trade, Australia has hedged its bets by ensuring its presence in both U.S.- and China-led blocs. Washington is in a hurry to complete a Trans-Pacific Partnership (TPP), which includes Australia, but excludes China. In turn, the TPP has intensified talks at a Regional Comprehensive Economic Partnership (RCEP), which excludes the U.S., but includes China — and Australia.

In security, Australia’s position has been shaped by its historical, though ambivalent relationship with the West. Since World War Two, the Australia, New Zealand and U.S. Security Treaty (ANZUS) has bound the three nations in the Pacific. Following 9/11, Australia has spent over a decade conducting counter-insurgency campaigns in both Afghanistan and Iraq. But now the status quo is changing.

As Washington began its pivot toward Asia, it intensified cooperation with Australia and New Zealand. Australia is no longer seen as “down under,” but as “top center.” In November 2011 U.S. President Obama and then-Australian Prime Minister Julia Gillard met in Canberra to announce plans for a sustained U.S. presence on Australian soil. For the first time since World War Two, Australian and U.S. strategic priorities are overlapping, say analysts in Washington. As a result, Australia is encouraged to improve its longer-range air capabilities with nuclear-powered submarines, unmanned underwater vehicles and submarine tenders.

Due to its inherent contradictions — Western identity, but Asian geography — Australia’s approach to security has historically been more nuanced in comparison to its Western allies, however. Consequently, Canberra is more likely to hedge between the U.S. strategic opportunities, which can ensure political stability, and the Chinese economic gains, which are needed for economic growth.

From the U.S. perspective, Australia, located between the Indian and Pacific Oceans, is ideally positioned as a gatekeeper over contested waters and preserving crisis stability in Asia.

From the Australian perspective, the bilateral interests are converging in security matters, but diverging in trade and investment.

It is this duality of interests — not convergence — that will account for Australia’s economic and strategic policies in the coming years.

In Asia Pacific, the new grand strategy may not satisfy any constituency fully, but all partially. In Canberra’s view, that’s enough because the alternatives are worse.

PHOTO: Smoke billows from chimneys at the Rio Tinto alumina refinery in Gove, also known as Nhulunbuy, located 650 kilometers (404 miles) east of Darwin in Australia’s Northern Territory July 16, 2013. REUTERS/David Gray


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Australia has a ‘resilient housing market’ ?
Try ‘massive property bubble’ and the economic story makes much more sense.
Everything else can be summed up with a term used by australia’s own central bank –
‘Dutch Disease’

Posted by DaveComments | Report as abusive

peeing in the wind….
Australia will more closely tie with Asia for economic reasons. Since there is little threat of a military nature, they don’t need the USCA for much of anything. As our economy deteriorates and the world de-Americanizes, we will find less and less friends in the world.

Posted by tmc | Report as abusive

Crikey, mate – that a lotta writing about not much in particular.

Posted by BidnisMan | Report as abusive

“From the U.S. perspective, Australia, located between the Indian and Pacific Oceans, is ideally positioned as a gatekeeper over contested waters and preserving crisis stability in Asia.” – Seriously, China has a standing army of two million troops. You have 80 thousand. In perspective that means if you filled Melbourne cricket ground with China army men there would we 11 of you in the middle. Your only hope is they agree to settle the dispute in a test match.

Posted by BidnisMan | Report as abusive

I agree with one of the other comments.
It is a lot of writing about something obvious.
After all global world means that each nation, even individual is interconnected and interdependent, nobody van pull away from others or isolate in such system.
Thus if the global economy is stagnating, slowing down then each and everybody will stagnate or slow down.
Also any solution to the global crisis has to be global and mutual, not competitive against each other.

Posted by ZGHerm | Report as abusive

When the choice is between an alliance and trade, Australia will pick trade. We have to if we’re to survive in the Asian century.

If Australia is forced to make that choice, don’t bet on the past predicting the future. What good is it allying with the US when for all intense purposes it appears that in the decades to come (as the sequestration illustrates to a degree) you’ll be fiscally unable to maintain the sort of global reach that comes with maintaining pax americana.

China is already illustrating that they will probably (as all great powers do) ignore the global ‘rules’ that do not suit an up and coming global power (south China sea, air defense zone). So at what point does America say we’re no longer going to tolerate this or that and at what point does Australia decide whether this is an issue that we should fight for?

For freedom and democracy? Or for maintaining American hegemony?

Posted by onlyif | Report as abusive

As @tmc observed Australia has 0 security threats. On any world hegemon list of “lands to conquer” Australia has 2nd place from the end before… Antarctida ;-)
At present 35% of Australian exports goes to China, it is mainly iron ore and coal (3Q 2013 data).
The trend will grow till about 40% in 2014-2015. Major mining companies are building facilities to export 1 billion Mt of iron ore a year.
But the ultimate Australian exporting commodity is URANIUM. Australia has the largest deposits in the world and China till 2025 will be the largest world consumer (China plans to have 200 GW of nuclear power in 2030 and 400 GW in 2040, US since 1990’s has constant 100GW).
Prevention of Uranium exports to China is the main long-term strategic goal of United States in Australia .
It will be effected first through Australian TPP membership and after that export embargo mechanisms based on TPP.
The stake is high as value of eventual Uranium exports from Australia will be higher than present value of iron ore and coal combined and the deposits will last for hundreds of years of mining activity.

Posted by Wantunbiasednew | Report as abusive

Housing bubble? I have been saying that since 1970 and have been consistently wrong. Until there are major changes to the financial market and proper infrastructure management of outer suburban communities nothing will change. Go 30 km from a capital and almost every newer community struggles from no transport, no schools, no medical facilities, inadequate roads, and marginal if any shopping. Bottom line is the housing prices are a function of government policy in approving these new communities that would be a release to housing prices in general, it is not market forces, excepting in the minds of those who focus on semantics or partisan arguments.

Posted by ArghONaught | Report as abusive