A World of Uncertainty

We live in an uncertain world
 
Trade tensions, country leaders who do not follow the status quo, wars and rumours of wars…
 
It can be easy to adopt a “bunker mentality” and hunker down for a long, cold economic winter ahead. Curiously, it’s not all bad news for Australia.
 
State of the economy
 
To their credit, the government has timed their infrastructure spend well, just when the construction boom on the east coast is contracting, itself following the end of the construction work on the west coast oil and gas projects. Secondly, the government and Reserve Bank have managed to keep inflation within the target band, at a rate of 2.1% this last year. Unemployment whilst nudging higher, is still below 6% nationally (albeit there are some fluctuations from state to state). Furthermore, the Reserve Bank has chosen not to increase interest rates given banks have been autonomously doing this in light of their increased cost of funds and APRA tightening regulations on how they should be capitalised to support lending.
 
The increase in activity in the economy today made the press in the form of “tax surge paves the way for pre-election spend”. What the headline does not tell you is a basic economic truth; policies that encourage economic growth create jobs, which in turn increase tax collections whilst reducing the amount the government needs to spend on welfare for the unemployed.
 
When we have strong tax collections the government can address debt and deficit and the psyche of the “man and woman on the street” improves as they become more comfortable with the future of the country, which improves consumer confidence.
 
Trade wars
 
Trade wars and tensions globally fuel anxiety and no doubt the current state of play between the US and China (2 of our largest trading partners) could leave Australian’s nervous. However, some perspective is required.
 
As the trade war intensifies China has threatened 25% tariffs on US LNG. As some background, the shale revolution in the US has created a glut in natural gas and prices have been driven to historic lows. China is the third largest buyer of LNG from the US.
 
With a 25% tariff on US LNG, Australian projects become far more attractive and the business case for the large investors in Australian LNG becomes much stronger. This will obviously have a flow on economic impact for Australia.
 
China is also looking to reduce its reliance on export driven economic growth (this trade war with the US highlighting how such an exposure to export driven growth can affect the economy), and focus on internal spending to drive growth. To that end, China continues to embark on an infrastructure spend and expansion, the magnitude of which is hard to fathom in the minds of the average Australian. For context, in the 2018 budget the Australian government announced it would invest more than $75 billion over the next 10 years in nationally significant transport infrastructure, projects that include Perth’s Metronet, Melbourne’s airport rail link, regional Victorian rail lines and Brisbane metro to name but a few. Last month China announced it would spend $197 billion (USD) on local government infrastructure projects alone. This does not include their major plan of the New Silk Road (estimated at $900 billion USD).
 
As a major supplier of commodities to China, much of this infrastructure is going to come from our exports to China. We truly are strategically placed in what has been described as a “changing of the guard”, economically.
 
Australia’s future
 
There has been much talk around our country’s future and what needs to be done to maintain the exceptional quality of life we enjoy.
 
There are some recent observations that support this school of thought. On 25 September the Reserve Bank published a discussion paper on the wages growth puzzle. Without going into detail, they identify an issue around productivity levels in high and low performing businesses and the pervasiveness of technology and how this is driving business. More recent observations around the savings rate in Australia post GFC (it has shrunk from 10% to almost 1%) supports the notion the average Australian doesn’t feel they are moving forward, merely treading water to stay where they are, or they are eating into their savings.
 
The challenge for Australia going forward is ensuring we can continue to grow at a rate that supports the ability to offer highly subsidised education, free healthcare and government pensions to name a few.
 
To various extents some parts of the economy have been actively pursing a transformation. A personal view I have is we should identify the “low hanging fruit” and exploit our advantages of geographical proximity to Asia, time zone, ease and transparency of doing business and observation of the rule of law. A good example is education, our 3rd largest export. Education is big business in Asia, we are geographically very well positioned and have world class universities. Technology can now also be leveraged in the delivery of courses to grow revenue streams without necessarily incurring large amounts of capital investment in infrastructure, and students can still enjoy part of their degree in Australia, where the Australian experience is a key selling point.
 
The migration program (read political hot potato) is also linked to this. Australia has amongst the strictest migration programs in the world and largely attracts the best calibre of migrants. The refugee program seems to attract the greatest political attention, but it is the skilled and business migrant program that should be applauded for bringing some of the best talent to Australia and injecting substantial investment into the economy. This should not be overshadowed by government’s need to better tailor the program to where the skills and investment need is most required and address rorts in the system.
 
Whilst not widely reported, our population growth has largely been on the back of inward immigration and if we don’t continue to have policies that encourage population growth via targeted immigration, we face the stark reality that countries like Japan and South Korea are now facing. Japan and South Korean economies risk major contraction in the coming decades as their populations age and an inadequate number of younger people enter the workforce to pay taxes that support services. Australia faces even greater exposure given the level of tax spend on welfare, health and education to Australian residents.
 
Conclusion
 
So, in a world of doom and gloom things are not nearly as bad as some would make it out to be. We are still very well placed, the fallout from the US and China trade war looks to fall in our favour, and our geographical location and natural advantages bode well for our future.
 
What we need is vision. Vision from our political and business leaders to create a future for Australia that will continue to make this one of the best countries in the world to call home.