Has the bubble burst for Australia's economy?
The envy of the world during the global financial crisis, Australia's economic future may be uncertain...but there is room for optimism.
On its current course, Australia’s budget will never return to surplus, according to a recent report. The Deloitte Access Budget Monitor said figures are worse than we think. “We project an underlying cash deficit of $45.9bn in 2014-15,” Deloitte announced. “That is a substantial $5.5bn worse than projected at Budget time and shows little improvement from the recorded deficit of $48.5bn in 2013-14.”
At the same time, the exponential wage growth and resulting PAYG tax growth we saw during the mining boom, which added to the rivers of gold flowing into government coffers at the time, no longer exists. Wage growth has slowed to a crawl as businesses struggle in the new economic climate.
Australian businesses have lowered expectations for activity across sales, profits, employees and capital investment as the new year approaches.
“That’s set to tear a new hole in the heart of the Budget,” Deloitte’s report said. “Add in the rising cost of Senate gridlock, and we see an underlying cash deficit stuck at $45.3bn in 2015-16.”
Adding insult to injury, in its latest Business Expectations Survey, Dun and Bradstreet, a leading provider of business information and insight for risk management, found that Australian businesses have “…lowered expectations for activity across sales, profits, employees and capital investment” as the new year approaches.
But it’s not all bad news. Putting it in a historical perspective, Dun and Bradstreet’s Adam Siddique, Head of Group Development, said business confidence remains historically strong. But he highlighted the cooling housing market as a potential challenge.
“There can be no doubt the Sydney and Melbourne housing markets are now slowing down, which is to be expected after a period of spectacular growth,” Adam said. “In light of the Treasury’s recent cut to its growth forecast, from 3% to 2.75%, it will be interesting to see how business confidence fares if this key driver of economic activity begins to fade.
“Housing, along with construction and other related activities, has underpinned growth following the end of the mining boom. The lack of business investment in non-mining areas of the economy suggests there will be no obvious candidates to pick up the slack should this turn into a sustained easing in the housing market.”
All of this leads to the question of whether Australia is still an attractive place to do business. Stephen Koukoulas, Economics Adviser to Dun and Bradstreet, said that although the Australian economy has lost some of the glow that it enjoyed over the last decade, it is still a very positive environment in which to operate.
“The things that have been good for Australia are our rule of law and our prudential regulation,” Stephen said. “It all sounds a bit boring, but one of the reasons we avoided the global financial crisis is our strong regulatory climate. And we still have that very good climate. In fact, we are tightening up on it.
We are transitioning, and rather than mining it seems we will have a couple of years ahead where it will be all about tourism and education. (Stephen Koukoulas, Economics Adviser)
“Plus, Australia is a rich country. The per capita GDP is up there amongst the top 10 in the world. We have remarkably high literacy rates. And of course we are close to Asia, both geographically and politically.”
So there are good reasons for businesses to invest in Australia, Stephen said. The downside, which has always been the case, is the lack of economies of scale. With a population of just 24m, innovation success is hampered by the fact that many good ideas are shipped offshore.
“We are transitioning, and rather than mining it seems we will have a couple of years ahead where it will be all about tourism and education,” Stephen added. “There will always be swings and roundabouts in the economy. If I was in mining right now I would be getting set for a pretty tough year or two. But if I was a tourism operator, a hotelier or a university I would be pretty upbeat.