5 June 2013

Opinion piece: Doomsday predictions don't stack up to reality


Published in The Australian Financial Review

Today we get a read-out on how our economy was tracking in the first three months of the year with the release of the March quarter National Accounts. As usual, there'll be commentary from the predictable quarters that offers up the worst possible interpretation of the numbers. If it's on the high side, the good news is unlikely to last. If it's on the low side, then some will seek to characterise it as proof of an economy in crisis. Of course that's not to say some parts of our economy aren't facing difficult conditions. But the doomsday predictions that too often dominate the headlines bear no resemblance to the reality of Australia's economic achievements.

While quarterly GDP figures give us important information on the economy, they also need to be viewed within their broader context. This is especially true at times like these when our economy is undergoing significant transitions, like it is today. The first of these shifts is within the resources sector, which is moving away from an unprecedented investment phase towards the production phase, and giving rise to a ramp up in non-rural commodity export volumes. More broadly, the economy is transitioning towards sources of growth outside resources. This transition is occurring against the backdrop of a high Australian dollar.

It's understandable that parts of the community feel uneasy about some of the economic adjustments that are underway. While Australia emerged from the GFC in a position of unparalleled strength, there's no doubt the lingering impacts of global uncertainty and pressure from the high dollar are being felt across many industries. While we can't be complacent about these challenges, or the shifts ahead, we also need to keep a few things in perspective.

Firstly, we have come through some big transitions over the past five years in very good shape, in a way that virtually no economist predicted. Unlike the first mining boom, the recent surge in mining investment has not been coupled with high rates of inflation and rising interest rates.  In fact, the cash rate is at record low levels. Remarkably, we have seen capital expenditure in mining grow something like 200 per cent over the past five years, but both inflation and interest rates have a '2' in front of them. Unlike past terms of trade booms, we've also managed to convert high commodity into permanently higher export capacity, which continues to rise. Over the same period, we've been hit by the worst global economic crisis in a generation. While we haven't been immune, we've emerged with an economy that has grown significantly above its pre-crisis level, with low unemployment and a triple A credit rating from all three major ratings agencies for the first time in our history. This extraordinary economic scorecard should give us confidence that we can face the transitions underway with runs on the board, and a track record of getting the big calls right.

Secondly, our economy is in many ways more resilient than it was before the GFC. Consumer balance sheets are now stronger. After rising by around 100 per cent in the decade to 2007, the household debt-to-income ratio has recently started to decline. As well as having record high investment, we are a high-saving economy – in fact our national savings rate is much higher relative to the major advanced economies. Australian banks also have more resilient funding profiles, and are less vulnerable to global turmoil.

Thirdly, we've got the right policy settings to support the transition in our economy going forward. In the lead up to the Budget, the Government made the choice to pursue a more gradual fiscal consolidation that didn't threaten jobs and growth, and one that continued to give the RBA scope to maintain historically low interest rates. Lower interest rates are undoubtedly starting to support an underlying improvement in parts of the economy, such has housing construction, and forward indicators suggest this will continue. Last week's capital expenditure survey not only indicated that mining investment is set to stay at high levels for some time yet, but pointed to a lift in non-mining business investment in 2013-14, consistent with our Budget forecasts.

Of course, making the most of this transition and grasping the enormous opportunities of the Asian Century will require a nation-wide effort. This is not just a task for government but also for business and communities across Australia. For the Government's part, we're continuing what we have done in recent years, progressing Australia's proud tradition of reform. By investing in big productivity-enhancing investments and reforms across education, skills, infrastructure and innovation, we're working to ensure our impressive record of economic resilience continues to make Australia a stronger, smarter and fairer nation.