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The state of Australia: business

In the lead up to the budget, the story of crisis has been hammered home, but there’s more to a country than its structural deficit. So how is Australia doing overall? In this special series, ten writers to take a broader look at the State of Australia; our health, wealth, education, culture, environment and international standing.

As we await the 2014-15 Federal Budget, business in Australia is generally wary, and in a period of transition on several fronts. After two decades of solid growth, many firms are facing new and complex challenges, and are not confident about what the future holds.

While business groups generally support strong action to reduce the budget deficit, many argue that the adjustment should be gradual and done in a way that assists the competitiveness of the non-mining sector. There is growing concern that a single-minded focus on “budget repair” could damage the economy in the short term and do little to assist the necessary processes of structural change over the medium term.

How are we doing now?

For Australian business, how you are doing now very much depends on what industry you are in, where you do business and whether you are trade exposed.

Mining generally remains strong, in spite of the continuing high Australian dollar and falls in key commodity prices. Many big miners can offset falling prices by increased export volumes as big projects come on stream, but some smaller miners are feeling the pinch. Resource investment has peaked, and is falling fast, but the volume of mining exports will rise for some years to come.

For manufacturers, other than those with natural protection, the situation is quite different, as we have seen repeatedly over the past year. Motor vehicle manufacturing is being closed down over the next few years, and many other parts of manufacturing are struggling. Wage and other costs (such as electricity) are very high when expressed in say US dollars, and exceptional productivity or an innovative edge is required to survive.

The finance industry is generally doing very nicely, thank you, especially at the larger end. For example, the combined annual profits of the four dominant banks are now about $30 billion. A sustained period of low interest rates, a strong stock market and a housing revival is always good for the banks.

Forecasts for the construction industry remained mixed.
AAP/Julian Smith

The construction industry is mixed, with the housing sector rising, commercial building still subdued and the engineering construction sector still at high levels as a result of the resources boom, but starting to fall rapidly. Infrastructure remains unsatisfactory, particularly public transport in the cities, as our cities clog up under the pressure of rapid population growth, dispersed development patterns and a focus on roads.

Many trade exposed service industries, such as aviation, are struggling to remain competitive, but education and tourism exports seem to be holding up. The core domestic service industries – health, education, transport and retail trade – remain relatively strong, supported by a shift in the pattern of demand and by continuing strong immigration.

Certain common themes underlie this complex mosaic. One is the rise and coming fall in resource investment, which might drop by 5% of GDP over the next three to four years. Another is the changing growth patterns in China, which is emerging as a massive but as yet untapped market for our food and professional service exports.

A third remains the high exchange rate, implying high wage and other costs in terms of US dollars, even in spite of rising productivity. And then there is the uncertainty about the budget, and concern that it might address a perceived fiscal problem at the expense of business, the community and the economy.

How we got there?

The background to this situation is in two parts, the longer term and the shorter term. The longer term picture is well known. It involves the biggest resources boom in our history, the transition of that boom to falling investment and rising exports, and the legacy of a high exchange rate and high costs generally in spite of historically low interest rates.

The shorter term picture is less well known, but also interesting. Since the election of the Abbott Government there has been a distinct pick-up in economic activity, fuelled by a jump in business and consumer expectations and by expansionary fiscal and monetary policy. But expectations are now rapidly subsiding, and the Budget will reveal the new direction of fiscal policy.

An environment of low interest rates has helped stoke the housing market, but expansionary fiscal policy is about to end.
AAP/Dan Himbrechts

In its first eight months, whether by accident or design, the Abbott government has followed a standard Keynesian approach, with expansionary fiscal policy together with low interest rates providing strong stimulus to the economy. The December 2013 fiscal statement indicates that, excluding the $8.8 billion transfer to the Reserve Bank, in 2013-14 receipts will grow by 4.0% and spending by 9.0% in nominal terms. The five point differential will inject a net $18 billion or over 1% of GDP into the economy.

The combination of low interest rates and the election of the Abbott government in September led to an immediate jump in various measures of consumer and business sentiment. For example, the three Australian Industry Group performance indices (manufacturing, services and construction) all jumped in September, and moved into positive territory by about year’s end. But as confidence has eroded they have fallen, and were at much lower levels in April 2014.

This combination of expansionary policy and improved sentiment led to an improvement in the economy – in housing, in retail sales and in employment. But the boost in sentiment has gone, and the expansionary fiscal policy might be about to go. Hence the uncertainty in the business community.

What’s next?

Governments influence the environment in which business operates in three main ways: by how they shape expectations, by their impact on the macro economy and by their policies to assist firms to meet the challenges they face and to make the necessary adjustments to changing realities.

In terms of expectations the Government’s performance to date has been a disaster, having quickly turned positive expectations into negative, and even losing the company directors!

More generally it seems to be shaping the budget with little awareness of the fragility of the economy right now and of the magnitude of the economic as opposed to the fiscal challenges ahead. But with so much spin and so many kites it is hard to be sure, and we will find out soon enough.

Further reading: The State of Australia series

The Conversation

Peter Sheehan does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation.
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