Ross Garnaut’s Warning Becomes Tony Abbott’s Bleak Reality

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There’s no other way to say it: Australia’s economy is in trouble.

That’s the take-home message from yesterday’s release of gross domestic product figures, which show Australia’s economic growth limping along at a dismal 0.2 per cent for the quarter, in seasonally adjusted terms. Across the year to June 2015, growth was slightly brighter, at 2 per cent.

Still, 2 per cent growth is not much to write home about. Australia’s economy needs to grow faster than this if unemployment is to fall. It’s little wonder, therefore, that unemployment has been rising steadily for months.

Tony Abbott took office with high expectations that the Coalition would be a better economic manager than Labor. It hasn’t turned out like that. Consumer confidence did indeed jump after September 2013, only to be smashed by the horror federal budget of 2014. The economic indicators have been deteriorating ever since.

Of course, it’s not all Tony Abbott and Joe Hockey’s fault. Australia’s real problem is our heavily unbalanced economy, which has suffered mightily from falls in global commodity prices. As iron ore, coal, oil and gas prices have all declined, so have the profits of our big energy and mining firms. It’s no surprise, therefore, that corporate profits are down. So are our export earnings.

Several large Australian resources companies are in real trouble: Fortescue, Santos, and Beach Energy have all been hammered. Just today, engineering and construction firm WDS filed for insolvency, taking more than 700 jobs with it.

Australia is not yet in a recession, but it’s starting feel like that. Real wages growth is low, and falling. Australia’s national income is falling. Business investment is falling off a cliff. Company tax receipts are low and exports are falling. Unemployment is at its highest rate for more than a decade. The federal budget is deep in deficit, and a surplus looks years away.

It’s sounding like the very thing prominent economist Ross Garnaut warned about back in 2013, in his book Dog Days. In a speech in that year 2013, Garnaut predicted that eventually there would be a big fall in Australian exports, and wondered what would happen next.

The result, he predicted, would be an “income recession”, in which Australia’s global purchasing power would be much reduced. So would our living standards.

“If there is no ‘switching’ of our production effort towards exports and our expenditure away from imports in response to exchange rate depreciation, and the whole of the adjustment is achieved by reducing expenditure, then the decline in average living standards will be large,” he warned.

Now that income recession looks to be on its way.

Look closely into the national accounts and you can see a number of ticking time bombs. With exports down, our current account deficit is widening. But while the Aussie dollar is falling, it will take some time for many of our non-mining exports become competitive again. As the saying goes, “you can’t fatten the pig on market day,” and Australia has seen many manufacturing businesses fail or move overseas in recent years. It will take time for services exports to emerge.

Housing was meant to be the saviour of our transition from the mining boom, spurred by low interest rates. But while housing construction is indeed a bright spot, contributing strongly to GDP growth, it was still not enough to offset falling construction in the resources sector. We’ll need to build a lot more houses to compensate for the end of mega-project construction in Australia’s north.

Similarly, it was hoped that consumers would ride to the rescue. And, to give our nation’s shoppers their credit, they are indeed returning to the checkouts. Household consumption grew by 0.5 per cent in the June quarter. Yes, it’s a good sign. But, again, it’s not enough to offset the end of the mining boom.

Big uncertainties remain. Should the economy continue to trend down, it’s quite possible that consumers will get spooked, making matters worse.

And let’s not even think about what might happen if the ever-expanding housing bubble in Sydney and Melbourne pops.

In times of economic weakness, the sensible thing for governments to do is to run a deficit in order to prop up domestic demand. Unfortunately, the Abbott government is already doing this. There seems to be little appetite for further stimulus, although some big spending defence purchases apparently helped last quarter.

That leaves monetary policy. The Reserve Bank may well cut interest rates again. But with rates already at record lows, we may not receive much growth dividend. As interest rates approach zero, they become much less useful in stimulating growth, a problem economists sometimes call “pushing on a string.”

What Australia really needs are a couple of big new industries ramping up their investment and creating lots of new jobs. In 2013, we had at least one good candidate in the renewables sector. Sadly, that industry has been smashed by the Abbott government, with its outright hostility to all things green.

Health and higher education are two other sectors with plenty of employment potential. Again, however, both have suffered at the hands of this government, and are currently in a holding pattern, rather than investing for the future.

A holding pattern is a good description of the Abbott government in 2015, really. Ever since the abortive coup against Tony Abbott in summer, the Coalition has struggled from day to day, with no strategy for the long or even the medium term.

As the Chinese economy continues to struggle, and as volatility grips global and Australian stock markets, things could well get worse before they get better.

No wonder many are predicting a double-dissolution election in March. If the government waits until late 2016 to hold an election, Australia may well be in a full-blown recession.

That’s a bleak scenario for Tony Abbott – assuming he is even prime minister.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.

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