Changing Fortunes of the Lucky Country
By: Dominic Holden
At the most recent Australian federal election, half of the voting public had not experienced a technical recession in their working life. Through sound economic management and some good fortune, the “lucky country” has experienced an unbeaten run of twenty-seven years of Gross Domestic Product growth, overcoming the turmoil of the Global Financial Crisis and instability of a globalised economy. However, this record and the associated benefits brought to the Australian people are under threat, with the economy experiencing a recession on a per capita basis in late 2018. The Reserve Bank of Australia has lowered the cash rate for the first time in nearly two years, an indicator that the central bank believes counter-contractionary measures must be employed to prevent an economic downturn. With the knowledge that a recession may be bearing down upon us, it is wise to ponder the impacts of a scenario never experienced by half the working population, and more importantly to question whether the overall growth of the economy is an accurate measure of living standards for everyday people.
Before any potential downfall is considered, it is just to pay tribute to the causes that enabled Australia to remain afloat longer than any other nation. With coal prices rising since the early 2000s and a booming China boosting export demand, the export of natural resources during the mining boom granted Australia a doubtless advantage over less naturally plentiful economies. As the GFC hit developed economics hard across the globe, policymakers followed textbook monetary and budgetary policy procedures, with the RBA cutting the cash rate from 7.00% to 3.00% within six months and the federal government figuratively throwing $52 billion at consumers to boost spending. The combination of good fortune and decisive policy enabled Australia to fare far better than its international counterparts, with New Zealand, the US and the UK all suffering the pain of a recession.
Unfortunately, both of these keys drivers of past growth are diminishing. The peak of the mining boom is well and truly over, and Australia must turn to other areas of specialisation such as tourism and education to cushion itself against global forces. Additionally, the potential expansionary impact of public policy has been severely diminished. The RBA cash rate sits at a historical low of 1.25%, while government debt has ballooned to 40% of GDP (roughly $530 billion), four times higher than in 2008. Thus, it appears Australia has little room to go – expansionary acts of scale reminiscent of the GFC-era would be fiscally irresponsible from a budgetary perspective, and practically impossible for the RBA considering how close rates are to zero. Therefore, it must be considered that not only is economic turmoil likely, but that the responses that enabled Australia to survive the GFC are rendered far less effective.
It is hard to be sure what a recession would look like in a country that has avoided one for so long. Modelling and predictions are inherently bound by the availability of relevant data, and the most recent Australian recession was close to three decades ago. The economy and nation have undeniably changed since, with labour market deregulation, the rise of the gig economy and generational shifts in population demographics. However, it can be expected that a recession will catalyse unemployment and lower incomes across the country as firms downsize or cease production. This will undeniably hit the hip pocket of everyday Australians, tightening household budgets. So, does this represent the end of Australia’s status as the lucky country, with turmoil set to engulf the nation?
Fortunately, the answer appears to be no. While a recession would undeniably have negative effects, it is not the sole indicator of living standards of a nation’s worth. The singular usage of GDP is fundamentally flawed; it does not account for the distribution of wealth amongst the population, a fundamental metric when considering the livelihood of a regular individual. Additionally, people care about non-material issues as well, with issues such as crime, the environment and amount of leisure time all contributing to an individual’s quality of life. Unfortunately, these issues are intangible and tend to be forgotten about in the discussion of the economy.
After all, the fundamental goal of macroeconomics is to maximise the living standards of the population – thus, it is naive to focus solely on GDP growth rate trends. Australia will have a recession sometime in the future, and it appears to be likely to occur sooner rather than later. However, Australia experiences natural ups and downs, and no one could state that the past three decades of growth have continuously delivered an uninterrupted improving quality of life for everyday people. Conversely, if and when GDP does decline, there is no guarantee that this will be detrimental to every facet of Australian life. Good government should be aware of this and seek to improve not only the economic state of the nation, but also the non-material issues that undeniably influence the lives of their populace.
In the words of former RBA Governor Glenn Stevens, Australia will experience a recession in the future; only the timing is uncertain. As the mining boom concludes and expansionary intervention becomes less effective, it appears this waiting time may be shorter than desirable. But this is not the end of good fortune for the lucky country. While everyday people are undeniably impacted by economic trends, their life is not defined by them. To improve the quality of life for all people, we must recognise this fact, and enable it to drive both the financial and social decisions our nation makes.
Sources: RBA, Australian Financial Review, The Economist, Bloomberg, Trading Economics
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.