Australia continues to live up to its enduring nickname, ‘the lucky country’, at least when it comes to the economy, writes Dr Sarah Hunter, Senior Economist at KPMG.
With gross domestic product growing by an estimated 3.75%, the Australian economy outperformed most other developed countries in 2022. While some of this strength is a result of the 2021 coronavirus lockdown providing a favourable base, the cumulative increase in economic activity since late 2019 (5.7%, as-of Q2 2022) puts the economy ahead of the US (4.8%), Eurozone (5.4%) and UK (2.5%).
And that’s not just the story of the last few years. Over the last decade, GDP grew by an average of 2.3% annually, comfortably faster than the OECD average (1.7%). Even when population growth is accounted for, Australia comfortably outstrips others with GDP per capita increasing by 0.9% a year, faster than the Eurozone (0.7%) and the UK (0.6%). While there are certainly challenges in the near term and we shouldn’t shy away from trying to lift long run productivity growth, Australia’s economy has generally been a strong performer amongst developed countries.
So, what is it that makes Australia so strong? Is it just dumb luck? Or are there aspects of Australia’s institutional, government and policy settings that are resulting in consistent outperformance?
Luck has definitely played a part. Most countries aren’t blessed with an abundance of natural resources; apart from crude oil Australia ranks in the global top 15 exporters for all major commodities (including agricultural products). This provides the economy with some natural protection when commodity prices are elevated, as they are now. While households and the non-mining sector are finding conditions challenging, mining companies and the government are enjoying a boost to their revenues. Indeed, this channel was responsible for around a third of the improvement in the budget deficit (to 1.5% of GDP) in FY22.
However, natural resources only make up a part of the picture. The mining sector only accounts for around 10% of economic activity, and by its very nature the success of the non-mining economy is much more contingent on solid institutions and policy frameworks – decidedly non-luck.
The combination of the mining and non-mining economies are a key part of Australia’s successful economic track record. As in other commodity countries, the mining sector in Australia tends to swing between booms and downturns – the performance of Western Australia’s economy through the 2010s is a testament to this – but these swings are typically offset by cycles in the non-mining economy. When Western Australia is riding high, Victoria and New South Wales tend to be in the doldrums and vice versa. This flexibility, which plays out through a floating exchange rate, an inflation-targeting central bank, and government redistribution of income across the states means that overall Australia can avoid recessions and achieve steady growth. The COVID-19 recession in 2020, which was exceptional in that large parts of the economy were forcibly closed, was the first on record since the early 1990s.
Looking into 2023, it’s clear that there are dark clouds on the horizon. Like most developed economies Australia faces heightened inflation and rising interest rates. While there are signs that headline inflation is now peaking – the rate dipped back in October, to 6.9% – the RBA Board has signalled that domestic price momentum is still uncomfortably high.
It looks as though the cash rate will top out at around 3.6% before the Board pauses to assess the impact, and these increases coupled with elevated inflation will squeeze household budgets – after rebounding 7.5+% in 2022, consumer spending is set to expand by less than 2% in 2023, well below the pace of trend growth. Furthermore, the outlook for Australia’s major trading partner (China) is subdued due to an ongoing correction in the property market and continued disruption from COVID lockdowns.
So, will Australia continue to outperform in the near term? Headwinds notwithstanding, it looks as though the answer is yes. After two years of border closures, migration is now rebounding rapidly – Australia’s policy commitment to inward migration, lifestyle and incumbent migrant communities make the country an attractive choice. The latest data for net overseas migration saw a recovery to an annualised pace of 385,000, the highest inflow since the height of the mining boom. The latest visa applications and granted data suggests that this trend will continue – in the first four months of the current fiscal year over 200,000 temporary worker, student and working holidaymaker visas have been approved, almost 40% of the total in FY19/20.
Inward migration should relieve labour supply shortages, but just as importantly it will also add to aggregate demand. This will be a welcome boost to retailers and consumer service businesses who are most vulnerable to households tightening their belts. Universities and other organisations connected with international students will also benefit from the full return of inbound international students, with the majority of this uplift set to be felt by inner city Sydney and Melbourne.
Government investment will also support aggregate demand. Many infrastructure projects are now playing catch-up as a result of supply chain delays and labour shortages, and the non-mining sector is also lifting their capex to take advantage of the tail end of the temporary lift in the instant asset tax write-off threshold. Furthermore, the mining sector is now looking at its investment plans, particularly in lithium, rare earth metals and other industrial commodities needed in the climate transition – although the actual materials are changing, Australia is once again exceptionally well-placed to take advantage of this next structural shift. In total, large companies currently expect to spend $159bn on capital expenditure in FY22/23, a lift of $17bn over the previous year.
Overall, GDP growth is likely to slow to around 1.6% next year. This is comfortably below trend, and the economy could well see a per capita recession, where GDP per person contracts for two consecutive quarters. Still, with data suggesting the US and Europe are already heading into recession, Australia remains on course to outperform yet again.
Not all luck then, but still very much the ‘lucky country’.
Dr Sarah Hunter is Senior Economist at KPMG
This article represents the views only of the interviewee and should not be regarded as the provision of advice of any nature from Forbes Australia. The article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Past performance is not necessarily indicative of future performance. You should seek independent financial and tax advice before making any decision based on this information, the views or information expressed in this article.