As the 13th largest economy in the world but only the 52nd largest population, we've always had a bigger appetite for investment than most of our peers. This appetite has been matched by Australia's attractiveness as an investment destination – an appeal that's only become stronger in recent years. So today I want to take a closer look at the current chapter in Australia's investment story. What it says about Australia as an investment destination, and what it means for our economic outlook – particularly for productivity. I also want to talk a bit about the productivity challenge facing Australia more broadly, and what the Government is doing to give our country more momentum at the dawn of the Asian Century.
There's no doubt that the past four years have been a remarkably difficult time for the global economy. The people in this room probably know better than just about anyone the challenges that business has faced internationally. Difficult global conditions have of course created challenges here at home, and with global volatility now a familiar feature of the global landscape, we can expect these headwinds to persist for some time. But the good news is that against the most turbulent global conditions in around 80 years, the Australian economy has emerged as one of the strongest advanced economies in the world.
- We have an economy that has been growing above its long term average, at its fastest pace in over four years
- Low unemployment along with 13-year low inflation
- Strong consumption growth along with high national savings
- One of only 7 economies with a triple-A sovereign credit rating and stable outlook from the three major credit rating agencies
- And the fastest annual growth in labour productivity in a decade – which I'll come back to later on.
This combination is not only impressive relative to other advanced economies – it is a uniquely strong set of conditions even by our own standards. For the best proof of Australia's attractiveness as an investment destination, it's hard to look past the investment that is surging through our economy. You would all be familiar with the extraordinary mining investment boom underway, which is driving growth in overall business investment. But you may not be aware of the record amount of investment that has already taken place in recent years.
Since the Government came to office in late 2007, there has been a staggering $919 billion of private business investment that has already occurred, despite the GFC. That's nearly equivalent to two-thirds of our annual GDP. New private business investment has been growing by more than 20 per cent over the year since last September, its fastest rate in a decade. And in the March quarter of this year, private business investment as a per cent of GDP reached its highest level in the past forty years at 16.7 per cent, and we expect it to rise further this financial year and next. And while we've seen a huge amount of investment occur already, there's still much more to come – most evident in the enormous pipeline of investment resources, worth half a trillion dollars. To put that in context, that's the equivalent of around one third of Australia's entire economy – a simply staggering figure. Obviously this pipeline moves around as projects are added or completed, and of course not every project goes ahead or proceeds as quickly as originally conceived. And there will always be questions about the timing and delivery of projects that are still at very early stages; this is to be expected from time to time.
But what is often forgotten is just how much of the overall investment pipeline is already at an advanced stage. These projects are largely locked in, are either committed or already underway. By itself, the advanced component of the pipeline still represents a massive increase in investment in our economy, standing at a record $260 billion. This part of the pipeline has increased by around $200 billion – or a stunning 350 per cent – since the Government came to office, and now represents more than half of the total pipeline. So not only has the total investment pipeline grown substantially in recent years, but a much greater proportion of the pipeline is at an advanced stage – and this is all in the face of very challenging global conditions. This speaks volumes for investor confidence in our nation's economic future.
It also means that our investment pipeline is more resilient in the face of global uncertainty than it was before the GFC. While demand from Asia and high commodity prices have undoubtedly underpinned growth in investment, some will mistakenly attribute Australia's investment pipeline to geology and geography alone. This not only overlooks Australia's more fundamental strengths, but it overlooks the pronounced shift in the way global investors see Australia. This is a shift that has been underway since the GFC. We can see clear evidence of this beyond the investment boom in mining. You only have to look at the demand for our government bonds by foreign investors, which is pushing down yields to record lows. This is because there is now a growing perception of Australia as a “safe haven” investment destination, given our fundamental economic strengths. Gone are the days when we were just a bet on commodity prices or a punt on China. The game has changed in the wake of the worst global recession in 80 years.
Avoiding recession not only gave us the foundations for our economic outperformance. It brought into sharp focus the underlying strength, flexibility and resilience of our diverse economy. It shone a light on the dividends we as a nation are banking every day from the big, tough reforms that were put in place by great Labor governments of the past. They set us up for today, just like the big reforms we're putting in place today will set us up for tomorrow. And due to our strict fiscal discipline, Australia now has a coveted triple‑A rating from all three global rating agencies for the first time in our history. So 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. Of course, we recognise that this overall strength is a mixed blessing for some businesses and investors.
Our attractiveness as an investment destination has contributed to our sustained high dollar, which is making business harder for many trade-exposed sectors. And strength in mining investment is creating greater competition for skilled workers. On top of this, global uncertainty, more cautious consumer behaviour and shifting consumer preferences are also weighing on some parts of the economy. But we shouldn't let these pressures – real as they are – obscure our fundamental economic strengths, investor confidence in our future, or our strong macroeconomic frameworks.
What often gets lost in the current debate about the mining boom is that the investment gathering pace is boosting the productive capacity of our economy. Take, for example, new engineering construction – which has increased by a staggering 154 per cent since the Government came to office. This investment is helping to build mines, ports, and important infrastructure that will deliver dividends for many years. Because as the mining investment boom eventually winds down as we expect, the mining export boom should ramp up. So the benefits of today's investment will endure well beyond the investment phase itself. Of course it's not just private investment that's building up our productive capacity. There's also substantial public investment underway in economic infrastructure, including in transport, telecommunications – like the rollout of the NBN, and infrastructure that will support the mining boom. We're already starting to see a lift in our export capacity as some of this investment – both public and private – comes online. This is also reflected in the Bureau of Resource and Energy Economics forecast that energy and mineral commodity export earnings will reach a record $209 billion this financial year, driven by higher volumes. But this investment is not only laying the foundations for greater production and greater exports.
Along with the Government's reform agenda and the response of firms and workers to structural change, this investment is laying down the foundation for a recovery in productivity growth going forward. Now, I agree with everyone who says we should be doing better on productivity, and that our success as an economy depends on it. I also agree that there has been a broad-based decline in productivity growth over many years. To an extent, this reflects the waning impact of economic reforms of the 1980s and 1990s, and the lack of productivity-enhancing reforms over the decade that followed. But what I can't agree with is those who say productivity is currently in decline, when it simply isn't borne out by the facts. The fact is we've seen a lift in productivity over the past year, with labour productivity in the market sector growing by 5.3 per cent. This is not only the largest annual increase seen in a decade, but it is well above the 10-year annual average growth in labour productivity in the market sector of 1.5 per cent. Of course, it's still too early to know if the recent increase in productivity growth is the beginning of a more enduring upturn.
Ultimately our productivity performance will be measured over cycles, and not years, but recent results are certainly encouraging. And while there has been a long run structural decline in productivity growth over a long period, we need to keep some of this in perspective. The reason we are the 13th biggest economy with only the 52nd biggest population is that we are ranked in the top dozen countries when it comes to labour productivity levels. And while there has certainly been a long run structural decline in productivity growth over a long period, not all of this is due to factors that are weighing on our prosperity. For example, it's entirely normal for productivity growth to be a bit lower during an investment boom, where there is large build-up of production inputs before the actual production comes online. The productive base of our economy would also be much weaker today if we had suffered the severe skills destruction that comes with recession, or if we hadn't made the critical investments in infrastructure, skills and training along the way. But this doesn't mean we can now turn a blind eye to the productivity challenge. There is no room for complacency.
One factor that has really sharpened the focus on productivity has been the recent decline in our terms of trade. While our terms of trade are still at very high levels, they came off their record peaks nearly a year ago, and we expect them to decline over the medium term as the global supply of our key mining commodities increases. With commodity prices no longer rapidly rising, firms will need to work harder to grow their incomes. There is greater pressure to re-gear business models, and to work in smarter, more creative ways. But while much of the solution will rest on decisions by individual firms and managers, we all have a part to play in improving productivity – government, business and workers all pulling together in the same direction. That's one of the reasons why the Government has always supported a cooperative industrial relations environment, not a confrontational one. We also can't view productivity through the prism of industrial relations alone – the debate needs to be broader and better informed than this. What we should be doing is seeing the productivity challenge as an opportunity for our firms and industries to grow not only in size but also sophistication.
While there is no one formula for success, many businesses should take this opportunity to turn their gaze to Asia, refocus business models to capitalise on Asia's rising middle class. Today, about two-thirds of spending by the world's middle class comes from Europe and North America, and around only one-quarter from Asia‑Pacific region. But by 2030, it is estimated that just under two-thirds of spending by the world's middle class will come from Asia‑Pacific region, and around only one third from Europe and North America. The number of middle class consumers in Asia‑Pacific region is expected to grow from half a billion in 2009 to 3.2 billion by 2030. This rising middle class will demand everything from complex consumer durables and high quality food, to legal, financial, medical, educational and tourism services. And as an advanced economy in this emerging region and as one of the strongest advanced economies in the world, Australia is in a prime position to grasp the opportunities of this transformation. That's why the Government has commissioned a White Paper on Australia in the Asian Century, which will identify the pathways Australia can take to make the most of Asia's ascent. Central to this task will be improving our productivity growth at home, because we can't anticipate the full spectrum of opportunities that will emerge as the Asian Century unfolds.
Government is one part of the answer to lifting productivity growth, which is why we're delivering on an ambitious and broad-based productivity agenda. Whether that's through investing in our productive capacity, reducing the regulatory burden on business or reforming the functions of Government – boosting productivity has been a priority from day one. One of the most important down-payments on our productivity performance has been our reforms and investments in skills.
We're not only investing over $15 billion in skills over the next four years, but we're reforming the system.
- We're introducing a new training entitlement to ensure that every Australian who wants training can get it
- Reducing up-front training costs by providing access to HECS style income-contingent loans
- And we are putting industry right at the heart of the training effort through our new co-investment program – the National Workforce Development Fund.
The historic levels of investment in education and skills we've delivered to date are already producing results: we have more Australians than ever completing schooling and going on to further study or training. I was very heartened to see the very positive reaction from the business community to these historic investments in skills and training, particularly in last year's Budget. We're also investing in infrastructure, so that Australia's ports, roads, and rail run efficiently and help Australian businesses move goods and services around faster and more cheaply. A huge infrastructure investment is the National Broadband Network – which will bring high-speed broadband to every single home and business in Australia.
As the digital age continues to revolutionise the way we live, work and do business, the NBN will make life easier. It will help businesses to lead a new wave of innovation. The implications of connecting businesses, health and education services, and households all across the country to high speed internet are immense. We're also introduced big, bold, hard-fought economic reforms, like putting a price on carbon pollution – because every first-class, first-world economy should be increasingly powered by clean energy. And by introducing the MRRT we're making sure the returns on our non-renewable resources are spread more widely and invested in our nation's future.
MRRT revenues are funding business tax reform, like the loss carry back we introduced this year, which will help companies that aren't in the fast lane to invest, grow and adapt to evolving economic conditions. They will also help fund critical infrastructure, and will help boost the nation's pool of superannuation savings by a staggering $500 billion by 2035, helping to grow our pool of funds available for investment. Reducing the company tax rate is another way we can boost investment in Australia and improve the competitiveness of our companies. That's why we've tasked the Business Tax Working Group to look at the benefits of cutting the company tax rate, fully funded from the within business tax system, after a company tax cut was blocked by our political opponents earlier this year. The Group will provide the Government with its final recommendations in December and I look forward to receiving them. Together, this reform agenda will help us grasp the opportunities of the Asian century, in which both domestic and foreign businesses will play such a critical role.
Even with our unrivalled strengths, Australia will need to sprint to keep up in this dramatically changing global environment. It's why we maintain an open and welcoming approach to foreign investment, built on decades of bipartisan support. And it's why as a Government, we are prepared to make the tough decisions to set our country up over the long term. Because the lesson of history is this: If we want to seize the opportunities of the future we can't remain handcuffed to an economy of the past. Reforms like the MRRT and carbon pricing will build a stronger economy in the long run. We make no apology for that.
Of course, robust public debate is critical. But so too are the facts. And the fact is that Australia's gold-winning economic performance cannot be put down to luck, geology, or geography alone. It is the product of good, but often very difficult decisions spanning many decades. Whether it is governments bedding down hard-fought reforms, business models evolving in the face of structural change, or the collective efforts by the community to avert the worst impacts of destructive global turmoil. It's these decisions that have given us a head start in the Asian Century. And it's the decisions we make now that will underwrite our prosperity in the decades to come.
Thank you. I look forward to the discussion.