One of our aims for 2017 is to begin partnering with organisations in Australia to bring our data to bear on some of the economic challenges they are facing there. We have had a dedicated Australian website for some time, but today we have published our first blogpost on the site. We have republished the piece in full below, firstly because the piece draws some interesting comparisons with the UK, and secondly because it is full of analysis and data that readers are bound to find interesting.
By the end of 2016, Australia had seen over 25 years of uninterrupted economic growth. If the first quarter of 2017 turns out to have been another quarter of growth, the country will have equalled the record set by Holland between 1982 and 2007. Yet this poses a question. Although the story over the past quarter of a century has undoubtedly been one of success, what are the areas of the economy that are currently most vulnerable?
A Brief Review
Let’s begin by reviewing some of the detail around that growth. If we look at the period from 2005 to 2010, and compare Australia with the US and UK, a couple of things become immediately clear. Firstly, in contrast to the US and UK, as well as other major world economies, Australia managed to ride out the global recession and continue to grow. Secondly, even since the end of the global recession, Australian growth has continued to outstrip that of the US and UK:
In addition, Australian growth in GDP per head has been favourable when compared to the UK and the US, helping the country make up significant distance on the productivity gap compared to the US (going from 83% to 87% of US GDP per head):
What Has Been Driving the Growth?
In attempting to explain the sustained growth that Australia has enjoyed, much commentary has focused on favourable commodity prices, which have benefited Australia as a major commodity exporter, but have adversely affected other advanced economies which tend to be net importers of commodities.
However, digging beneath the GDP figures to look at productivity, the success story is less clear cut. Along with most other advanced economies since the global financial crisis, Australia appears to have almost lost the ability to improve its efficiency in bringing together labour and capital to make products and services measured, albeit imperfectly, by Multi-Factor Productivity (MFP). MFP measures the overall efficiency with which labour and capital inputs are used together in the production process. In layman’s terms, it describes “the ability to do more with the same”, and it should really expand along with innovation.
What has been driving Australia’s productivity performance seems to be “capital deepening”, which is extracting more output-per-worker by ensure they have more machines and equipment. According to the Productivity Commission, Australian growth has been substantially dependent on large-scale investment, yet this is of course not something that can continue indefinitely. This dependence on continued investment, and the sensitivity of Australia to commodity prices, together explains why Australia’s growth may be more vulnerable than its recent experience suggests. In the mining industry, for example, capital investment exploded in the wake of the commodity price escalation of the late 2000s and has since begun to tail off.
Winners and Losers
Having had such a prolonged period of growth, it could be tempting for the nation to rest on its laurels, assuming that the growth will never end. Yet it’s often at such times when the economy is at its most vulnerable. Where, if anywhere, might those vulnerabilities be? Using our data, we can look at each broad level industry to give us a sense of trends:
As you can see, the majority of industries have enjoyed growth since 2001. In terms of numbers, health care and social assistance has been the biggest, with 650,532 new jobs added from
2001-2016, with professional, scientific and technical services coming in second with 408,911 new jobs. In percentage terms, mining has been by far the biggest growth sector, with growth of 189% (equating to 150,958 new jobs), with the electricity, gas, water and waste services sector coming in second with 80% growth (65,045 new jobs).
Out of the 19 high level sectors, only three employed fewer people in 2016 than they did in 2001 (agriculture, forestry and fishing (114,842 less jobs); information, media and telecommunications (7,961 less); and manufacturing (164,174 less)).
However, in terms of what might be the more vulnerable parts of the national economy, it is clear that the last few years has seen a decline in a number of sectors. From 2012-2016, manufacturing continued to see decline with the loss of 53,362 jobs; wholesale trade lost 28,102 jobs; and information, media and telecommunications lost 4,809.
Focus on Mining
But perhaps the biggest story has been the decline of mining. From 2001-2013, an average of 15,432 new jobs were created in the sector, reaching a high of of 264,986 in 2013. By 2016, this had fallen by 34,230. However, as the following charts show, if we look at the more granular sectors within the broader level mining industry (3-digt ANZSIC level), we can see that the slump hasn’t been entirely uniform, with oil and gas exploration bucking the trend:
Much of the decline in the mining sector can be attributed to a slump in commodity prices since the summer of 2014, and particularly a decline in demand from China. The Government has recognised this vulnerability by moving to a more service-led economy, but so far, according to a report from Goldman Sachs, tourism and education have “offset only about one-sixth of the decline in bulk commodity export earnings” since the first quarter of 2014 (net exports of tourism and education services rose by A$5.4 billion whilst bulk commodity exports declined by A$32.5 billion).
The lesson for the immediate future is that Australia can no longer rely on its export of commodities to sustain its growth. Instead, there is a critical need to grow its presence in other industries. However, although the country has pronounced regional advantages in education and tourism, these are strong in very different regions to the mining industry, and are some distance yet from filling the gap. If the growth is to continue, finding new markets for these industries will be vital.