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Australian economy settles post transition

In the land of the tall poppy, you know things are good when the dismal scientists – the economists – start to talk the economy up. They risk receiving a belting from the gloom and woe sector of the commentariat and of being accused – an economist’s nightmare – of being a Pollyanna or simply too bullish. So when leading economists line up to declare the Australian economy has weathered its post mining boom ‘transition’ and is entering a new phase, its time to sit up and take notice.

First of the economists to enter the fray was the influential David Gruen, these days of the Department of Prime Minister and Cabinet, but formerly of Treasury. He described the impact of the mining boom in Australia as an extremely large shock, saying:

“…in aggregate the Australian economy has adjusted remarkably well to what has been an extremely large shock – certainly the Australian economy has suffered substantially less disruption than the economies of the other major commodity exporting countries.”

To emphasise the point, he deployed a chart showing historical investment in the resources sector. It is included below, displaying both the rise in resources investment and the subsequent drop-off in the current financial year.

fig18

From less than 2% of GDP prior to the boom, investment in resources tops out at around 9% of GDP before plunging back to more normal levels in the current financial year.

Once that shock to the system is understood, its not hard to imagine that a consequence was higher national incomes and wealth. A correction, reflected in lower hourly wages, seems to have been inevitable for the economy to make a successful transition. And sure enough it did, with Gruen stating that Australia has experienced:

“…gradually falling real average earnings per hour across the economy over the past four years, for the first time in living memory.”

The chart below shows the details.

fig19

But at the same time, Gruen shows that the outcomes have been variable across sectors with average wages movements assisting sectors to adapt and transition. The chart below shows that some sectors saw their average wage relative to the aggregate wage move up over the last few years, while others moved down sharply. This level of movement is uncommon, considered historically around major periods of change.

fig20

The transition of the Australian economy has thus been aided by some labour market flexibility and the resultant and apparent ease with which wages have moderated to the adjusting circumstances.

Gruen concluded by suggesting that in terms of macro-economic cycles, the US is in a stronger position than Australia, is likely to increase rates before Australia and as a result, the Australian Dollar should be expected to depreciate, providing further support to the rebalancing of the Australian economy.

It is refreshing to hear the economy described in positive terms and for the recent history – somewhat tumultuous though it has been – to be placed into a transformational context. To read the full speech go to: http://www.dpmc.gov.au/news-centre/domestic-policy/how-has-australia-responded-terms-trade-decline   

To provide even further context, the Sydney Morning Herald’s Economics Editor Ross Gittins wrote a week later that most economists did not pick the progressive and stable transition of the last few years. Gittins wrote:

“So how come the big-name economists’ forebodings proved misplaced?

“I think they underestimated the extent to which the micro-economic reforms of the 1980s and ’90s, combined with the improved “frameworks” for the conduct of macro-economic management, have made the economy more flexible …

“…In particular, they underestimated the way the moves to a floating exchange rate, an independent central bank and decentralised wage-fixing would help us cope with our periodic commodity booms.”

Assuming for a moment that Gittins is correct, the Australian economy has been in transition continuously for most of the last four decades, and to follow Gruen, that process is continuing and is in the nation’s advantage.

 

 

Posted Date: February 24, 2017

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