In a June speech this year, the Governor of the Reserve Bank made the observation that Australia’s economic glass is at least half full. He noted that the Australian economy had grown by over 4% in the previous twelve months. In the three and a half years since the crisis of late 2008, the economy had now reached a level where GDP per capita exceeded the peak it reached in early 2008. In other words, average “economic income” for Australians is now higher than it has ever been. This progress is highlighted in the graph below. It also shows how other Western economies have fared over the same period. The recession in the US has been much deeper, but recovery has been occurring. Interestingly, the Euro area looks quite strong, but that is almost entirely due to Germany. Japan was also growing strongly, but was seriously affected by the nuclear disaster. The economy that is having the greatest challenge in moving into recovery is the UK.
Like Australia’s two-speed economy, he suggested there were many lanes on the global economic highway: fast (China and the developing world), slow (much of the developed world) and very slow (the UK). There are also a few economies in the breakdown lane, notably Greece.
Australia also has sectors of its economy that are travelling at very different speeds. The mining sector is the obvious example of growth. The sectors struggling the most are manufacturing and retailing. In the last twelve months, the increase in employment in mining has more than exceeded the loss of manufacturing jobs. This shifting around of jobs between sectors and geographic regions is probably one of the causes of the deep pessimism that currently pervades Australian public opinion. We see jobs being lost; they make the headlines. But most of us don’t get to see the even larger number of jobs being created in the mining sector; and they don’t make the headlines.
The other big shift for Australians is the change in our spending patterns. For the thirty years to 2005, Australians were spending an increasing proportion of their incomes on consumption. We saved very little and incurred increasing levels of household debt. The crisis of 2008 highlighted the reality that this spending splurge could not go on forever. Since then, household spending has been virtually flat and the level of household savings has more than doubled. The savings are going towards reducing debt levels and increasing investment in bank deposits. We are building wealth the old-fashioned way! While this trend is very admirable, it has been frustrating for the sectors of the economy dependent on household spending, which continue to experience very weak conditions.
Ultimately, as wealth builds and debt levels drop, we will move into other investments such as shares and property. I don’t think any of us want to return to a bubble economy dependent on ever-rising prices for real estate and shares. Hopefully this time we will be more sober and more rational. At least for a few years!