Sean Daly | Contributing Writer
Sea, sun and surf, the three pillars of a surfer’s paradise and three things which Australia has an abundance of. More recently it has also offered employment, something that is even rarer to find in today’s world. Australia has done remarkably well since the global financial crisis (GFC) hit in 2008, posting annual growth of between 1% and 4%. This tour de force is largely thanks to the country’s thriving mining sector, which today accounts for an increasing share of the countries GDP. There are however clouds over Australia’s horizon. People are becoming increasingly worried about what will happen when the mining boom ends and the effects it is currently having on their economy.
This is why people are eager to diversify the areas that make Australia’s economy so strong because then if one falters, the economy won’t be affected as badly. If you want to take advantage of these efforts then you can invest in some Australian companies that are currently seeing tremendous growth due to the success of the economy. If you’ve not invested before then take a look at this guide on how to buy shares uk.
Australia’s version of the GFC was remarkably timid in comparison to the rest of the world’s experience. 2008 and 2009 saw a considerable slowdown in GDP growth, but (thanks to the government’s stimulus package) it never went into recession. 2010 saw a surge in commodities prices worldwide which spurred renewed investment from mining firms in Australia. These investments (estimated to be as high as 170$ billion in the year 2010 alone) boosted growth back up to beyond 4% in the space of a few months and relieved any worries about recession. This growth, although declining, has persisted until today with the Australian economy currently growing at 3.8%. Recent estimates have even indicated that this investment is due to peak in 2014 before falling significantly. This could spell the end of the mining boom.
Australia has been and will continue to benefit from this mining investment. However even during the heydays of 2010 a storm was brewing in the form of an increasingly divergent two-speed economy. While the mining sector was celebrating renewed growth, the rest of the economy was feeling the pinch of the global recession. Retail and Manufacturing were hit particularly hard with major companies in both sectors slashing jobs. Another important factor neglected at the time was the lack of employment provided by the mining industry, which only accounted for 2% of the country’s employment. These worries are the result of three underlying problems behind Australia’s newly found economic growth.
Firstly, the success of the mining industry has significantly strengthened the dollar making it harder for Australian exporters to compete internationally. The mining industry, which exports large amounts of raw materials, appreciated the Australian dollar from 2.50$ against the British pound, to 1.50$ earlier this year. This hurt other exporters, especially in manufacturing, which became significantly less competitive against its international rivals. This continues to be a considerable challenge to any company competing internationally and has forced even major companies, such as Qantas, to cut its costs through redundancies.
Secondly, a geographical rift has formed between the southeast, where the majority of the population lives, and the rest of the country. The states of Western Australia and Queensland have benefitted the most from the boom with Victoria and especially Tasmania being left behind. Although, theoretically this should not be a problem as labour can move to where the jobs are, this did not happen in Australia. There are two reasons for this, firstly as stated earlier mining didn’t require a huge increase in labour to accompany its investment. Secondly, many of the new jobs that were created went to immigrants, as working in the mines, despite being very lucrative, is somewhat taboo in Australia.
Thirdly, the boom created by the mining gave Australians a feeling that they had navigated the GFC successfully and that it would be plain sailing from now on. Many Australians have taken the opportunity of the past few years to tour Europe, snap up American property or invest in Asia. However, if this mining boom stifles and breaks Australia’s economic climate will change dramatically and many Australians will not be ready.
Their situation today is not far from the position Ireland found itself in the late 1970s. At the time the Irish and indeed the world, believed that the government’s stimulus spending had successfully steered the country through the 1974 oil crisis. However, as the 1980s later showed they had simply postponed the crisis to detrimental effect. The country found itself having to deal with the effects of both inflation and unemployment, but with the added pressure of high debt. Australia today finds itself in a similar position to Ireland, but with a few vital tools still at its disposal.
The Australian government is still one of 15 AAA credit rating countries left in the world and can therefore avail of cheap credit, quickly. This is the first important difference between Australia today and Ireland at the end of the 80s. The government has also recently returned the budget to surplus, which will help fund any future spending. It also benefits from having time to prepare for this eventual slump while it is still enjoying the boom of mining. The various state governments have used this opportunity to conduct long overdue austerity. The Victorian state government recently announced over 750$ million in savings in their last budget. Such measures will help the states cope in a downturn, as they will be maximising their revenue. These three factors, if used correctly could be the difference between a smooth transition and a hard landing.
The Australian situation at the moment is very precarious. It is still enjoying the fruits of its mining boom, but this cannot continue indefinitely. The question is. when it stops will the rest of the economy be able to take over? For Australia to continue its recent success the government will have to invest heavily in infrastructure to help its sluggish manufacturing sector while also funding education to help its population adapt to the change. Luckily it is in a position where it can avail of its strong credit rating and budget surplus to fund this investment. It could also help this transition with the introduction of measures such as a carbon tax or an emission-trading scheme, which would redistribute some of the wealth currently being generated in mining. This would not only help fund the needed investment, but would also help address the current imbalance felt in the economy.
The sooner the Australians act the better. Their culture of “no worries mate” although charming, will probably be their undoing, as little will be done before it is too late. They see themselves as a safe haven in the stormy conditions of the rest of the world and are happy to sit on their success instead of preparing for the future. Although today Australians are enjoying a yet another beautiful summer with little economic turmoil, if nothing is done soon it will face the prospect of entering into a recession, while the rest of the world finally claws its way out of theirs.
