Australia in Gold position
Australia has yet to set the world alight in the Olympics so far, but in economic terms they remain a model to follow for other nations. The IMF has predicted they will be the best performing advanced economy over the next two years; with GDP growth forecasts for 2012 estimated at 3.3%, unemployment currently low at 5.2% and a low budget deficit of 0.7% (Britain’s deficit is 8.2% in comparison). In GDP per capita terms, Australia is ranked fifth in the world, higher than both Germany and Britain. In the UN’s Human Development Index (a measurement of the standard of living) Australia ranked second last year, in fact Australia had eight times as many adults earning over $100,000 than the World-wide average. On top of this the nation’s Public Debt to GDP ratio is currently 24%, the lowest among the OECD countries.
The left table shows Australia in second place in the UN’s Human Development Index.
So how is Australia doing so well in such difficult times?
One major reason is the mining boom the country is currently experiencing. Australia is rich in mineral wealth and has a large mining industry that is pushing the economy forward. Australia’s close proximity to China has seen the two countries develop a good relationship, where China’s unprecedented demand for raw materials helped fuel the mining boom. This and the combination of high commodity prices helped Australia weather the financial crisis and keep unemployment low. Australia has now become the leading producers of minerals in the world, with mineral exports accounting for half of all of Australia’s exports. The mining sector also accounts for 9% of Australia’s GDP (roughly the same as manufacturing) and from 2006 to 2011 the value of mining exports more than doubled. The fear is that China’s recent signs of slowing down could have an impact on the future of Australia’s mining industry, which would certainly slow down the strong growth that the country has been experiencing. The sharp fall in commodity prices won’t help either, so Australia might have to work on diversifying their economy more to help lower the impact of a decline in the mining industry.
This graph shows the big increase in exports of Iron and Coal, as Australia experienced a mining boom.
Another factor is the strength of the Australian currency. The Australian dollar has grown in value since the financial crisis and has seen the country become a haven for investors. With the EU set to implode and the USA facing a fiscal cliff at the end of the year, Australia remains one of the only AAA credit countries with a stable future outlook from all three of the top credit agencies. They offer secure government bonds with high yields; a ten year Australian bond yields 3.05% compared to Britain’s (another AAA credit nation) ten year bonds which only yield 1.48%. This is seeing more and more cash running through Australia and investors putting their money into Australian assets. The decline in commodity prices could weaken the Australian dollar, but even then that would give a timely boost to Australian exports, as foreign companies would be able to buy Australian goods for cheaper.
The Economist’s index based on the prices of McDonald Big macs over different countries shows Australia’s currency has increased in value by 22%.
Another factor in Australia’s success has been in attracting talent to the country. Since 2007 Australia has slowed down the total number of visa’s it offers, but importantly has increased the number offered to skilled workers by 23,000. Australia now offers nearly as many visas to skilled workers as the USA despite having a much smaller population (22.5 million compared to 311.6 million). This has meant an influx of talented, useful immigrants have come into the country and improved Australia’s productivity and employment figures.
But there are hidden problems. Australia has been criticised as a two speed economy, where sectors that aren’t linked to the mining boom are said to be in very slow speed or could even be going backwards. There is evidence supporting this idea, with Fairfax (a media company) announcing 1,900 job cuts and Hastie Group going into administration losing the country 2,000 jobs, while starts of new building constructions fell by 11% in 2011. Another problem is the Labour government currently in power, headed by Prime Minister Julia Gillard. They are deeply unpopular after releasing a new carbon tax on the public, despite it having good intentions and the fact that Australia is one of the least taxed advanced economies. The parties polls show that just one in four Australians are prepared to vote them back in at the next elections. This leaves companies wary of any promises being made by the current government, as the rival parties seem sure to reverse some key polices like the aforementioned carbon tax. Finally, the country also has a problem with its current account (imports and exports); publishing a deficit of 3.5%. This has long been a problem for Australia, as they lack a successful export orientated manufacturing industry. Improvements in this area could prove a big step to diversifying their economy away from the dependence on a mining boom.
This graph shows the current account deficit problem that Australia have had to deal with for a while now.
But despite the potential problems they face, the country stands in a great position – they are the envy of America and a pipe dream for Europe. If this was the Olympics we were talking about, Australia would be gold medallists by now.