Australia: the lucky country

The FT published a piece over the weekend claiming that Australia is on track to surpass 26 consecutive years of growth, surpassing the record set by the Netherlands in the post 1945 period of capitalism.

Australia’s right-wing finance minister Joe Hockey was bullish, claiming that the slowdown in China would not damage the Aussie economy because there were big investments coming from the Chinese and other Asians that would keep the Australia’s record of avoiding a capitalist recession.

“Cassandras are loud, whereas optimists are getting on with the job. We are going to break the record and go beyond the Dutch,” he said. “Our growth is somewhere between 2 and 2.5 per cent and that’s with the biggest fall in the terms of trade in our history.”  The Netherlands enjoyed 26 years of economic growth between 1982 and 2008 on the back of discovery of North Sea oil. In comparison, Australia has enjoyed 24 years of uninterrupted growth.

However, that might be coming to an end.  The latest real GDP figures for Australia came out today.  Real GDP growth slowed to just 0.2% in Q2 2015, taking year-on-year growth down to 2%, the slowest rate since 2013.  The slowdown is driven by slowing demand from China for Australia’s raw materials.   The fall in net exports has taken 0.6% pts off growth.

Aus net exports

And it’s not strictly true that Australia had avoided recessions in the last 20 years or so.  If we measure Australia real GDP per head, then there was a contraction in 1990-1 and the Great Recession saw growth per head flatten out.  Even so, it is a pretty good record compared to any other major advanced capitalist economy.

Aussi real GDP

The reason is fairly clear, I think.  Australia has been ‘lucky’.  It has been alongside the huge expansion in growth and trade in China and other Asian countries in the last 25 years during the period of ‘globalisation’.  As Hockey said, “Australia was uniquely placed to benefit from China and Asia’s long-term growth by exporting resources, agricultural produce and services to the region”.  Also the economy benefited from an influx of skilled labour through immigration from all parts but also immigrants who came with wealth of their own to invest.

This shows in the profitability of Australian capital.  I collated three measures of Australia’s profitability as a capitalist economy since the early 1980s and profitability has risen by 40-60% (but that’s not unlike many other capitalist economies during the so-called neo-liberal period).

Aussie ROP

But are the good times over? The latest GDP data might suggest this. Chinese economic growth has been dropping off and other Asian economies are in trouble.  Demand for Australia’s iron ore, coal and other minerals has weakened.  Australia’s trade account has been deteriorating and unemployment is rising.

Aussie exports

If you compare average real GDP growth per head since 2008, Australia’s per capita growth has slowed from 2.5% a year from 1992 to 2007 to exactly half that rate at 1.25%.  Australia did not escape the global Long Depression at least in the sense of lower growth.  Also, the profitability graph above does suggest that profitability may have peaked in the last ten years or so.

The argument of Hockey is that, although Australia’s mining industry may be falling back because of weakening Chinese demand, Australia can compensate for that through the services sector and foreign (Chinese) investment.  “Our services industry, which is 70 per cent of our economy, provides everything that the emerging middle class wants in healthcare, education, tourism and financial services,” he said. “It is starting to lift quite significantly.”

For the first time in 2013-14, China became the largest source of foreign investment in Australia, leapfrogging the US. Total investment in real estate was $74.6bn, up from $51.9bn a year earlier.  Hockey reckons that the boom in property investment was helping the economy’s transition from a decade-long mining investment boom by creating jobs in housing and apartment construction.  “It is helping to fuel a construction boom in Sydney, Melbourne, increasingly in Brisbane and I think we will see it spread around the country,” Hockey said, claiming that fast-rising house prices in Sydney and Melbourne were not a “bubble”.

It would be interesting to hear from Australian readers of my blog on how they see Australia’s economy panning out.

16 thoughts on “Australia: the lucky country

    1. Thanks Liz, you notice he does not discuss profits and profitability. What is lost on most mainstream economists is blisteringly obvious to every worker: profit and profitabity are really, really important. Just why and how is another discussion.

  1. These are initial comments. First thank you for, from afar, providing a neat summary of the Australian economy that includes in it a serious focus upon profits and profitability. Second, a golden rule of Australian economic discussion – NEVER believe anything that Joe Hockey says because we have learned just how wrong, hypocritical, contradictory and self serving his contribution is, not even going to its neo-liberalism and embrace of austerity driven policies that attack the 90 percent with specific focus on the aged, the young unemployed, students of all ages, manufacturing workers and wage earners in general. Even from a capitalist point of view his competence to understand and manage and talk about the economy is very poor. That’s why the talk about him being removed is intensifying. Third, economic critique from the left and the labour movement is dominated by a Keynesian perspective, some of which is thoughtful and constructive and useful in the day to day struggle against the government and the system it manages. It is very rare to get a useful take on profits and profitability. However, in the light of the Productivity Commission’s recent first draft report on Australia’s workplace and industrial laws, it is VERY MUCH NEEDED. I am going to take a closer look at your profits numbers even though I AMWU not an economist and not trained in that method of analysis. However, I have done some work on profitability in manufacturing and so far that reveals that profitability has been falling over the past 10-20 years. Hopefully, more to follow.

    1. Don, Yes this is a good piece by Peter Jones, young fellow Marxist economist. His measure of Australian profitability of capital also shows a rise from the early 1980s, although not as much as the measures I calculate in my post. Peter’s measure is of ‘underlying’ profitability and probably looks only at productive assets and removes fictitious profits. This has been work that Peter has done before for the US. See my post

  2. I think debt will prove a major constraint.
    60% of it is real estate debt, most of which owed by households. On the flip side, the same 60% of the total debt stock means that Australian banks’ assets are inflated real estate loans made feasible by abnormally low interest rates!

    The way debt accumulated means Australians massively banked on future growth, and in the worst way possible as housing assets only depreciate with time and its value was stamped way above original replacement value back then…

    In a nutshell I risk saying Australians banked twice on Chinese: first by not converting the basic commodities trade surplus in operating asset base and/or human capital, second by inflating a real estate bubble sustained by the wishful expectation that they will be able to sell it to Chinese upper middle class desperate to colonise the Land Down Under.

    I am curious to understand what is your view on this variable and how it affects things (or not).

  3. The price of housing in Australia is politically inflated by regulating the supply of homes in such way as to not quite match the demand for them. As the population increases through immigration, the politicians, (many of whom own real estate themselves) keep careful eyes on this supply and demand quotient, making sure that price remains on the upswing. As Chinese based capital moves into the markets of Sydney and Melbourne, the bubble of price over value based on socially necessary labour time, grows by leaps and bounds, increasing the GDP and the illusions of well being which go with it.

    Cui bono?

    As usual, it’s the upper 10% and the companies that they own.

  4. I agree with your assessment Australia has been the ‘Lucky Country’ for the past 20 or even 50 years and this has been largely due to attractive rates of profit and foreign investment up until now. Australia does not have a very large manufacturing sector and in particular is not heavily invested in the assembly line industries. This is going to be a blessing over the next 20 years as traditional manufacturing processes are robotised. Our natural resources are vast compared to a country like the UK and require very high end technical services for development and exploitation. Our service industries have done well but now have major challenges in competing with Chinese service industries in the future. Our weak point is the price of land which is inflated by bank business practices you have previously described so well. Unfortunately the Chinese seemed to have jumped on the band wagon and recently driven property prices through the roof in some cities. I am advised by local Chinese colleagues some of this investment is now being recalled by the Chinese government authorities cracking down on corruption. I understand this is what is behind the Chinese ‘leapfrogging’ other countries investing in Australia. Notwithstanding, legitimate Chinese investment will increase over the next decade as wealthy Chinese look for somewhere safe and close by to park their money. That’s the way I see it at the moment. It seems to me no one economic theory explains all of this and it is more to do with human behaviour and what large groups of people will do when borders collapse and boundaries need to somehow be redefined. Australia more than most countries is caught up in this. All we can do is look to the future and try to be a part of it.

  5. Hi Michael and Australian comrades too

    I think the first thing to keep in mind is that Australia is a capital importing country, and always has been. And the really great crises in Australian capitalism have been a product of huge capital inflows stopping: 1892-3, 1929-31 and to a lesser extent, 1975.

    The second is that Australia’s is a small part of advanced western capitalism; maybe 1/20 the size of the US economy, so global investor confidence can keep the economy growing during recessions elsewhere, which is what happened during the Asian financial crisis, the dot-com collapse, and even 2008-9.

    Third: the experience is that those capital inflows can continue long after the real rate of profit has collapsed, so long as enough global investors are drinking the kool aid. In the late 1880s, profitability in wool had collapsed, but pastoral expansion continued because sheep prices were sustained by pastoral expansion (ie new sheep runs required sheep) and that was fuelled by British investors. Likewise, the real estate bubble in Melbourne, far in excess of what we have at the moment, was also sustained by British investors. In the late 1880s, Australia was attracting something like 1/4 of all British foreign investment, and it was all blowing up a bubble. When both fell over, much of the banking system went with them, and the consequent depression was probably worse than the 1930s. Whole swathes of the middle class were wiped out. One consequence was that all parties to the first federal election (1901) promised a government pension scheme.

    Fourth: Because of all this, the “boom” is about the production of the means of production (as well as housing). The mining boom was not a mining boom (ie digging stuff up and selling it), but a building new mines boom. Engineering companies, construction, heavy machinery manufacturers, and other mining services, made squillions. The bust is the bust in mining development. There is also a fall in export receipts because the increased production is attracting much reduced prices. Classic over-production of the means of production.

    Now there would be a really nasty recession, except that Chinese and other capital is pumping up Sydney and Melbourne construction. Part of that is the belief that prices will keep rising, but I strongly suspect that many Chinese investors are looking for somewhere safe to park their money. Context: Xi Jinping’s purge which has already hit over 100,000 officials. What would you do if you were a Chinese official with a few million who had taken bribes (and how many haven’t)? If your kids had gone to uni in Australia and knew their way around the place?

    I think I saw the other day that Chinese investment was $65 billion last year, up from $50 billion the year before.

    So capital investment is sharply down, from about 19% GDP to 15%, but there has been a continued rise in apartment construction to partly offset it.

    Partly fuelling that is a truly colossal level of private household debt; around 150% of disposable income and huge overseas debt; gross foreign liabilities are currently running around $3 trillion or twice GDP; partly balanced by substantial overseas assets around $2 trillion. But that’s still a big hole if foreign capital gets nervous. Because the people with assets overseas aren’t going to use them to pay other people’s debts. So it’s a very unstable situation.

    I’ve learned the hard way that the rate of profit asserts itself…. eventually and not according some formula. So it would be foolish to predict a disaster next year. But the underlying situation is very unstable and unsustainable.

    The treasurer? He lives in a very special space reserved for those with unlimited access to pharamacological innovations…

    Phil Griffiths (Solidarity)

  6. The much-touted boom in residential appartment buildings in inner city Melbourne is about to be seriously curtailed. Both the State government and senior planners and managers of ‘The world’s most liveable city’ are clamping down on congestion and shonky construction practices, such as the use of cheap and dangerous fire-prone materials imported from China and undersize windowless bedrooms.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: