Australia can weather a slump in mining investment as low interest rates and infrastructure spending spur other industries, while Japan could return as the nation’s biggest trading partner, economist John Edwards said.
Replacing 2 percent to 3 percent of gross domestic product with non-mining sources of growth over five to six years will be “onerous but not difficult,” the Reserve Bank of Australia board member wrote in a paper for the Lowy Institute titled “Beyond the Boom.” A lower Aussie would also help, he said.
The assessment is in part a rejoinder to debate on the economy that’s often based on a false premise of failure, Edwards said, with pessimism reflecting an historic reliance on drought-prone farm output. Extension of Australia’s economic expansion, which began before the fall of the Soviet Union, will depend on individuals and businesses in areas like services discovering how to tap opportunities in Asia, he said.
“In half a century of increased trade with Japan and then Korea, Australia has been unable to substantially expand its exports beyond raw materials,” Edwards said. “The emergence of an Asian economic community based around China now offers Australia a second chance.”
Edwards rebuffs assessments that Australians squandered the latest mining boom, saying they saved much of the windfall from higher commodity prices and mining spending only added 3 percent to real gross domestic product anyway. The non-resident fellow at Lowy said the GDP gain had been “big, but as a change over eight years it is not that big.”
China surpassed Japan as Australia’s biggest trading partner in 2009 as its demand for iron ore to produce steel for construction led to a jump in prices for the commodity. Edwards sees a chance for that to reverse should the relative size of Australia’s China and Japan liquefied natural gas markets be sustained through 2017-18.
“It is possible that by 2017 Japan may again be Australia’s single biggest customer for goods and exports,” he said. Gas production and exports will also be important for “the revenue streams they provide for the Commonwealth and state governments,” he said.
Edwards’s immediate concern is the state of government finances, and he spends some time unraveling the contradiction between a country that has expanded for almost 23 years that is still unable to control its budget.
He said the fiscal deterioration is “startling, serious and of major public policy consequence,” adding that it materially contributed to the Labor government’s defeat, hurt the reputation of its then treasurer and hampers his successor.
He is skeptical about Treasurer Joe Hockey’s plans to cap spending for the next decade, saying at least half of the budget repair will come from higher tax revenue because that is the main source of the problem. Slowing pension and health spending will also be a “lively debate,” he said.
Edwards rejected the notion that Australia abandoned reform during the mining boom, citing the introduction of a goods and services tax to ensure states had sufficient revenue, a national industrial relations system and improved quality of education. He noted that in the decade to the third quarter of 2013, 2 million long-term migrants moved to Australia, increasing the population by a tenth.
Edwards said the economy’s resilience and flexibility could be strengthened by improving the quality of the bureaucracy and teachers, and better leadership in government and business. Yet he stressed the biggest influence will be the career choices of young people.
“Australia has not been living in fool’s paradise during the mining boom, it has not been complacent, it has not wasted its endowment,” he said. “With reasonable care, with attention to its strengths, with a lively interest in the opportunities opened by the growth of Asia, it will continue to do well.”