We can't afford to be a mini-me

BY ROD ORAM

NO DOUBT Australia is the envy of other countries. With only one quarter of negative growth during the world's worst economic crisis in 80 years, it is the only developed country to avoid a recession.

And with its recovery under way, it was the first rich country to raise interest rates since the crisis began, although Israel took the overall honour. But Australia is the first of any country to raise interest rates twice.

Two main factors are driving this impressive performance: Consumers were quick to resume spending, thanks to the Rudd government's $A77 billion stimulus package, equal to 6.4% of GDP over four years; and China was quick to resume buying Australia's minerals as its economy rebounded.

While Prime Minister Kevin Rudd claims credit for the first factor and is thankful for the second, he is far from complacent about Australia's long-term prospects. He says the country can't rely on consumer and minerals booms to secure a high, sustainable living in the global economy.

Instead, it must embark on a decade of nation building, he wrote in "Pain on the road to recovery" a thoughtful article published by the Sydney Morning Herald in July. He argued for making tough decisions on raising the superannuation age, tackling climate change and reforming taxes, regulations and government.

He also argued for concerted investment in research, education skills and other drivers of productivity growth to reverse weakness of recent years. Australia's productivity has grown by only 1.1% a year since 2004, compared with 2.2% a year 1998-2003 and 3.3% a year 1993-1998.

In fact, one-third of the stimulus package is going into the likes of improving schools, trade training facilities, universities and research institutions. These educational initiatives count towards infrastructure's 70% share of the overall package.

The rest of the package, some $A21b or 1% of GDP growth this year, has been a big boon to consumers. Household income rose 12% in the year to September, thanks to cash grants, breaks for first-time home buyers and other government incentives, boosted by the central bank's cut in interest rates.

Households have stashed away some of the gains, lifting their savings rate to 3.6% of net income in the latest financial year versus 0.7% the previous year. Their appetite for more consumption and house buying has risen strongly.

They've also enjoyed better employment prospects than expected when the world was at its gloomiest this time last year. The unemployment rate has hovered around 5.75% for the past five months, up only 1.75 percentage points from the recent low in early 2008. With companies still cautious about hiring, the rate is expected to peak at 6.5% in the third quarter of next year.

But Westpac's economists are among those who wonder what trouble this consumption-led growth will cause. They forecast that household debt will rise by 17.5% from mid-2008 to the end of 2010, whereas incomes are forecast to rise only 5.4%. Given rising interest rates, the average level of debt service for households would hit 30% of incomes, near all-time highs and putting some households under serious strain.

This consumption boom is likely to cause other problems, economists warn. It will exacerbate the rise in interest rates and the Australian dollar, thereby undermining the recovery of business, particularly foreign exchange earners such as tourism and agriculture.

Nonetheless, consumer and business confidence has surged this year from the short, sharp setback suffered last year. Many stockmarket companies, for example, have made the most of improving investor sentiment. They have raised $A60b of equity this year, triple the average rate of recent years and almost all through additions to capital rather than new offerings.

Heavily indebted resource and real estate companies have raised most of the equity, using it to repay loans. Only a small proportion of the new money is being invested in productive capacity.

Although capacity is relatively tight because the downturn was so short and shallow, companies will likely remain reluctant to increase their investment while serious doubts still hang over the durability of the global recovery, the Reserve Bank of Australia said last week in its latest monetary policy statement.

Moreover, the sudden recovery in confidence is unprecedented and thus difficult to interpret, the RBA added. It may partly reflect relief that the downturn was not as bad as expected so it "may not translate fully into household and business spending".

In addition, volumes and prices of mineral exports may not rise much further if world demand remains subdued. Still, the RBA raised its forecast of GDP growth to 1.75% from 0.5% for this calendar year and to 3.25% from 2.25% for next year. But it cut its forecast for 2011 to 3.25% from 3.75%.

Given Australia is by far our largest trading partner, its early recovery is good news for us. Tourism, construction materials and a number of other sectors will enjoy brisker trans-Tasman trade.

But if consumption-led growth pushes up Australia's interest rates and currency, ours could be pulled along with them, making recovery more challenging for our exporters and other businesses.

This same tension between positive and negative impacts of Australian growth also applies very strongly to long-term strategic issues. For example, we can hope to earn a bit of a living off the back of a burgeoning Australian economy.

But Australia is enjoying its fastest rate of population growth since the 1960s. We're likely to see soon a pick up in the number of Kiwis joining the throng.

The youngest are the likeliest to go. They have the most to gain and the least to give up. In the last 14 months the number of unemployed 15 to 19-year-old Kiwis has tripled. Almost 25% of them are jobless. The number of our unemployed 20 to 24-year-olds has risen at a similar rate to 10.9%.

Does Australia really offer them a brighter future? Yes, at the moment. It is tackling economic development with far greater scale, speed and strategic focus. This is evident in Rudd's July article and his government's work programme. For example, it will receive this week a report from the Australian Financial Centre Forum, a government-industry taskforce working on recommendations to make the country a leading Asia Pacific financial centre.

And others are contributing to the analysis, debate and proposals on economic policy. For example, Glenn Stevens, the Reserve Bank governor, said in a recent speech that Australia had to invest very heavily in the supply side of its economy to ensure it could meet fast-rising demands from Asia.

But it's clear that Australia fails to get the much bigger strategic picture. Thus, it might impair its long-term growth prospects once it has maximised its Australasian opportunities.

Take last week's big financial services deal. AMP and AXA are proposing to take over AXA Asia Pacific to divvy up between them. AMP is delighted to get $A4b of assets that will reinstate it as the leading Australasian financial services company. Yet AXA will get $A8b of Asian assets. It is obvious which company is buying itself the far bigger strategic opportunity.

Likewise, Australian financial sector companies are grumbling that the country's G20 membership means they are likely to get new, more rigorous and restrictive international regulation. Well, they might. But do they want to be part of the global system or not?

So, it would be a big mistake to be too unnerved by Australia's renewed growth or its medium-term prospects. It would be an even bigger mistake to relegate New Zealand's economic development strategy to becoming a small regional market in Australasia. This is a real risk since our government's vague strategy sounds like a watered down version of Australia's.

Our real challenge is to realise we are quite different from Australia in many ways. While there are many things we should do together, our biggest opportunities in the global economy will require us to pursue some ambitious strategies independent of theirs.

We must be ourselves, not Tasmania's twin sister.

- © Fairfax NZ News