The Old Economy Strikes Back (Almost)


We are still big spenders.

But that’s not worrying the authorities now, as it did just a few years ago. Back then, they feared that our huge debt binge would end in tears. Now, though, they are almost comfortable and relaxed.

Why? The main reason is that we are, once again, in the grip of an old-style boom.

Back in the days of the Victorian gold rush, Australia was, perhaps, the richest country in the world. Glittering wealth, extracted from the Ballarat goldfields, was opulently displayed on the streets of Melbourne in the bright bonnets of the Establishment’s daughters. But that bout of exuberance was followed by the great crash of the 1890s.

Twenty years ago, Australia was slipping backwards in the world trade stakes. That was said to be because we were selling low value items like iron ore, wheat and wool while we bought expensive items like cars and computers. Economists were telling us that this couldn’t continue. Big current account deficits would kill us. So the authorities slapped high, almost fatal, interest rates on the economy.

So what has changed, now? In one word: China.

Over the last three years, Australia’s terms of trade have improved by no less than 32 per cent as Chinese buyers push up the price of our coal, iron ore, natural gas and other resources. Meanwhile, import prices have stayed flat.

A table that Malcolm Edey, Assistant Governor of the Reserve Bank, presented to a business audience in Sydney last week shows that only one other country, Russia, did better, chalking up a 48 per cent improvement. That oil and gas rich country is heavily into the resource trade, too.

Oddly, perhaps, the leading edge, high-tech countries represented in that table all suffered quite substantial reverses. These included Japan, South Korea and even the United States.

Do all these figures, produced by pointy-headed economists and statisticians actually matter to people out in the real world? You betcha! They mean more iPods for the young and more BMWs for the old.

The Australian Statistician, Brian Pink, illustrated this last week in his 84 page document detailing the December quarter National Accounts [for 2006. These reports showed that our spending, or technically our ‘final consumption expenditure’ rose by 3.5 per cent last year, even though our output, or the Gross Domestic Product (GDP), rose by just 2.8 per cent.

We were able to spend heavily, without sinking much further into debt, because we also had a 6.5 per cent boost in our terms of trade last year. We can, largely, thank the Chinese for that, even though new buyers from India also helped. (Ever wondered why the Prime Minister, John Howard, stopped calling the Chinese leaders Communists or Reds some time ago? It’s because, now, they’re just good customers.)

Thanks to Fiona Katauskas

The National Accounts threw light on some hot spots in the Australian economy. For example, they showed that the ‘implicit price deflator’ for Australia’s GDP rose by 4.2 per cent in December 2006. That was Malcolm Fraser’s favourite measure of inflation and it’s still a good, indeed the broadest published guide to national price rises.

However, ANU economist, Bob Gregory, insists this does not mean Australia is necessarily facing another rate rise next month even though that figure is well above the Reserve Bank’s 2-3 per cent inflation target.

‘You have to look at what goes into that figure,’ Professor Gregory told New Matilda. He said the ingredients included the upturn in Australia’s terms of trade. ‘So that’s a good thing,’ he concluded.

The ABS figures also showed that costs on new engineering projects leapt by 9.1 per cent last year as mining and resource companies scrambled to build the new infrastructure needed to fill the rising orders from their Chinese clients.

But don’t booms usually go bust? Will that happen again?

Surprisingly, perhaps, for an economist, Edey is quite optimistic. He notes that Australia is now in its 16th year of expansion. He admits that one reason why both China and India have been chalking up extraordinarily high growth rates is that they started well behind more mature economies, like Japan and the United States. He notes, too, that, growth rates in both Japan and South Korea have eased as their economies have matured.

However, Edey says that, even after three decades of rapid growth, the Chinese population is still well behind the relative income levels that both Japan and South Korea reached when their growth rates began to slow. India, too, is still lagging in that respect.

‘On that basis, there is at least the potential for this process of catch up growth in the two most heavily populated countries to continue for decades to come,’ he says.

Take care, Malcolm Edey. If you keep talking like that, you might find yourself before the courts of that most dismal science economics facing charges of excessive exuberance.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.