Mark Rider | UBS Global Asset Management |
At the 1976 Montreal Olympic Games, Australia won no gold medals. But out of this failure, the Australian Institute of Sport was born which became the foundation of our subsequent success. For the economy, it took the collapse in the Australian dollar in the mid 1980s – the so called Banana Republic episode – to drive the reforms that have laid the foundations of what is now 21 years of uninterrupted growth.
In the past, a crisis has been the catalyst for necessary structural reform. But a sense of crisis is far removed from our recent economic performance.
Let’s look at how the Australian economy has performed on the world stage over the last few years. While no one measure is perfect, a look across a range of indicators gives a good sense of how we’re ranked.
Average growth in real GDP since 2000 is 3%, ranking us only 120th out of the 184 countries in the IMF’s database (Figure 1). We are only ninth in our peer group of high income, advanced economies over the same period of time, although it does improve to sixth if we focus on just the past four years.
Figure 1: Real GDP Growth: 2000 -2011
Percent (%)
| 1 | Equatorial Guinea | 16.1 |
| 2 | Qatar | 13.5 |
| 3 | Turkmenistan | 13.4 |
| 4 | Azerbaijan | 12.9 |
| 5 | Angola | 10.6 |
| 6 | China | 10.4 |
| 7 | Myanmar | 9.8 |
| 8 | Sierra Leone | 9.1 |
| 9 | Nigeria | 8.7 |
| 10 | Bhutan | 8.3 |
| 20 | India | 7.4 |
| 41 | Singapore | 5.6 |
| 80 | Hong Kong SAR | 4.1 |
| 106 | Brazil | 3.5 |
| 120 | Australia | 3 |
| 126 | Luxembourg | 2.6 |
| 134 | Sweden | 2.3 |
| 135 | Iceland | 2.2 |
Source: International Monetary Fundy (IMF)
Figure 2: Real GDP Growth Percent (%)
Source: IMF
Figure 3: Australia’s Olympic Medal Tally – Summer Games
|
Year |
Gold |
Silver |
Bronze |
Medal |
Table Rank |
||||
|
1986 |
2 |
0 |
0 |
8 |
1964 |
6 |
2 |
10 |
8 |
|
1900 |
3 |
0 |
4 |
7 |
1968 |
5 |
7 |
5 |
9 |
|
1904 |
0 |
3 |
1 |
4 |
1972 |
8 |
7 |
2 |
6 |
|
1908 |
1 |
2 |
1 |
16 |
1976 |
0 |
1 |
4 |
32 |
|
1912 |
2 |
2 |
2 |
12 |
1980 |
2 |
2 |
5 |
15 |
|
1920 |
0 |
2 |
1 |
16 |
1984 |
4 |
8 |
12 |
14 |
|
1924 |
3 |
1 |
2 |
11 |
1988 |
3 |
6 |
5 |
15 |
|
1928 |
1 |
2 |
1 |
19 |
1992 |
7 |
9 |
11 |
10 |
|
1932 |
3 |
1 |
1 |
10 |
1996 |
9 |
9 |
23 |
7 |
|
1936 |
0 |
0 |
1 |
30 |
2000 |
16 |
25 |
17 |
4 |
|
1948 |
2 |
6 |
5 |
14 |
2004 |
17 |
16 |
16 |
4 |
|
1952 |
6 |
2 |
3 |
9 |
2008 |
14 |
15 |
17 |
6 |
|
1956 |
13 |
8 |
14 |
3 |
2012 |
– |
– |
– |
– |
|
1960 |
8 |
8 |
6 |
5 |
Source: Australian Olympic Committee
In 2011, the budget deficit of the government sector was ranked 112th, with sixteen advanced economies ranked ahead of us (Figure 4).
Figure 4: Budget balance: 2011
Percent of GDP (%)
| 1 | DR of Timor-Leste |
210.2 |
| 2 | Brunei Darussalam |
24.4 |
| 3 | Kuwait |
23.6 |
| 4 | Republic of Congo |
19.5 |
| 5 | Norway |
12 |
| 6 | Oman |
11.8 |
| 7 | United Arab Emirates |
10.3 |
| 8 | Azerbaijan |
9.8 |
| 9 | Saudi Arabia |
9.4 |
| 10 | Angola |
7.9 |
| 14 | Singapore |
3.2 |
| 19 | Korea |
2.1 |
| 27 | Sweden |
0.8 |
| 28 | Switzerland |
0.8 |
| 39 | Luxembourg |
-0.7 |
| 42 | Finland |
-1 |
| 55 | Germany |
-1.7 |
| 86 | Denmark |
-3 |
| 111 | Netherlands |
-3.8 |
| 112 | Australia |
-3.9 |
Source: IMF
However, if we look at debt as a share of GDP (Figure 5), the story is much better with a rank of 29th and with only Luxembourg of the high income economies having lower debt.
Figure 5: Budget balance Percent of GDP (%) 
Source: IMF
Average inflation since 2000 is the 59th lowest with the unemployment rate the 26th best in 2011, both credible performances.
Despite having only the 50th largest population, the Australian economy last year was ranked the 13th largest, worth US$1.5 trillion.
GDP per capita in 2011 of US$66,984 placed us fifth, up from 23rd in the world in 2000 (Figure 6).
Figure 6: GDP per capita (2011)
US dollar ($1)
| 1 | Luxembourg | 122,272 |
| 2 | Qatar | 97,967 |
| 3 | Norway | 96,591 |
| 4 | Switzerland | 84,983 |
| 5 | Australia | 66,984 |
| 6 | United Arab Emirates | 66,625 |
| 7 | Denmark | 63,003 |
| 8 | Sweden | 61,098 |
| 9 | Netherlands | 51,410 |
| 10 | Canada | 51,147 |
| 11 | Singapore | 50,714 |
| 12 | Austria | 50,504 |
| 13 | Finland | 50,090 |
| 14 | Ireland | 48,517 |
| 15 | United States | 48,147 |
| 16 | Belgium | 48,110 |
| 17 | Kuwait | 46,461 |
| 18 | Japan | 45,774 |
| 19 | Germany | 44,556 |
| 20 | France | 44,401 |
Source: IMF
Real median household disposable income growth of 3.6% per annum (Figure 7) since 2000 is only bettered by Poland in the OECD. This is in stark contrast to the declines in the United States (0.2% pa) and Germany (0.4% pa).
Figure 7: Real median household disposable income growth 2000-2010
Percent (%)
| 1 | Poland | 4.3 |
| 2 | Australia | 3.6 |
| 3 | Greece | 2.8 |
| 4 | Norway | 2.7 |
| 5 | Hungary | 2.4 |
| 6 | Czech Republic | 2.4 |
| 7 | Finland | 2.2 |
| 8 | New Zealand | 2.1 |
| 9 | Mexico | 2.1 |
| 10 | Sweden | 2.0 |
| 11 | Austria | 1.8 |
| 12 | United Kingdom | 1.6 |
| 13 | Canada | 1.5 |
| 14 | Ireland | 1.1 |
| 15 | France | 1.0 |
| 16 | Switzerland | 0.9 |
| 17 | Israel | 0.7 |
| 18 | Luxembourg | 0.7 |
| 19 | Denmark | 0.6 |
| 20 | Belgium | 0.6 |
Source: Organisation for Economic Co-operation and Development (OECD)
The Australian dollar is the second strongest performing currency versus the US dollar with a rise of 83% since end
2000 (Figure 8).
Figure 8: Currency vs USD: 2000 – 2011
Percent (%)
| 1 | Turkmenistan Manat | 174 |
| 2 | Australian Dollar | 82.7 |
| 3 | New Zealand Dollar | 76.3 |
| 4 | Somali Shilling | 60.4 |
| 5 | Lithuanian Litas | 50.1 |
| 6 | Vanuatu Vatu | 49.8 |
| 7 | Armenian Dram | 43.1 |
| 8 | PNG Kina | 42.7 |
| 9 | Croatian Kuna | 40.6 |
| 10 | Comorian Franc | 40 |
| 11 | Cameroon Franc | 39.7 |
| 12 | French Polynesian Franc | 39 |
| 13 | Bosnia & Herzegovina Mark | 38.6 |
| 14 | Euro | 37.5 |
| 15 | Thai Baht | 37.3 |
| 16 | Macedonian Denar | 36.3 |
| 17 | Albanian Lek | 33.9 |
| 18 | Brunei dollar | 33.3 |
| 19 | Peruvian New Sol | 30.8 |
| 20 | Slovenian Tolar | 24.6 |
Source: Bloomberg
We top it all off by winning the gold medal for being the richest nation in the world (Figure 9). The Credit Suisse 2011 Global Wealth Report ranks Australia number one with median wealth per adult of US$221,704. This reflects a 145% gain in house prices since 2000, a gold medal winning performance amongst the OECD economies.
Figure 9: Median wealth per adult
US dollar ($1)
| 1 | Australia | $221,704 |
| 2 | Luxembourg | $164,720 |
| 3 | Italy | $155,954 |
| 4 | Belgium | $133,572 |
| 5 | Japan | $128,688 |
| 6 | UK | $121,852 |
| 7 | Iceland | $106,702 |
| 8 | Singapore | $101,033 |
| 9 | Switzerland | $100,901 |
| 10 | Ireland | $100,351 |
| 11 | France | $90,271 |
| 12 | Canada | $89,014 |
| 13 | Austria | $88,112 |
| 14 | Norway | $87,377 |
| 15 | Finland | $86,256 |
| 16 | Spain | $71,797 |
| 17 | New Zealand | $68,226 |
| 18 | Israel | $60,355 |
| 19 | Netherlands | $60,056 |
| 20 | Qatar | $58,029 |
Source: Credit Suisse
Much of this recent success comes down to Australia riding the commodity super cycle. Since 2000, the Australian terms of trade – the ratio of export to import prices – has almost doubled (Figure 10), the top performance by an OECD member country. China’s rising appetite for coking coal and iron ore, basic inputs into steel production, has seen both prices sky rocket in the past decade.
Figure 10: Total terms of trade growth 2000-2011
Percent (%)
| 1 | Australia | 98.42 |
| 2 | Norway | 37.48 |
| 3 | New Zealand | 22.25 |
| 4 | Canada | 20.44 |
| 5 | Luxembourg | 8.49 |
| 6 | Denmark | 7.74 |
| 7 | Poland | 7.74 |
| 8 | Switzerland | 3.51 |
| 9 | Spain | 2.92 |
| 10 | Portugal | 0.67 |
| 11 | Netherlands | 0.08 |
| 12 | Mexico | -1.54 |
| 13 | Greece | -1.63 |
| 14 | Germany | -1.83 |
| 15 | UK | -2.17 |
| 16 | Belgium | -2.59 |
| 17 | Hungary | -2.62 |
| 18 | France | -3.3 |
| 19 | Turkey | -4.28 |
| 20 | Czech Republic | 4.3 |
Source: OECD, UBS Global Asset Management
Firstly, it drove the appreciation of the Australian dollar, in turn boosting the US dollar value of assets or income denominated in Australian dollars.
Secondly, the higher terms of trade boosted real domestic income by around 1.25% per annum since 2000. With nominal GDP growth averaging 7% over the same period (Figure 11) – the fourth best in the OECD – this allowed strong, widespread growth in both wages in profits. This has also supported asset prices.
Thirdly, the budget was driven into surplus with an avalanche of revenue. However, $110 billion of this has subsequently been given away in tax cuts and increased spending, much of it in the pre-GFC boom period.
Figure 11: Nominal GDP Percent of GDP (%)
Source: IMF
Figure 12: Nominal GDP and house prices, Nominal GDP and All Ords Log scale
Source: Australian Bureau of Statistics (ABS), UBS Global Asset Management
Figure 13: Commonwealth Budget Percent of GDP (%)
Source: Commonwealth Government Budgets (various), UBS Global Asset Management *Adjusted for tax and spending policy changes.
But China is at a transitional point in its development. Trend GDP growth is easing and commodity demand has slowed, enabling supply to catch up with demand.
Productivity growth, not higher commodity prices, will need to drive real income gains in the years ahead.
But, over the past decade, we haven’t won any gold medals in this category. The OECD finds we are ranked only 20th amongst the major economies for labour productivity growth since 2000 (Figure 14).
Figure 14: Labour productivity Percent of GDP (%)
Source: OECD
A range of factors is behind this slump. Some are temporary and a matter of timing.
The mining sector has invested heavily in recent years but it usually takes some time before higher output follows. The depressed cyclical state of the non-mining part of the economy will also drag on productivity.
But the decline in productivity also has a deeper seated origin with signs of reform fatigue. The World Bank’s “Ease of Doing Business Survey” report, which attempts to measure the regulatory environment across the world, shows Australia has slipped from fifth in 2004 to 15th in 2012 (Figure 15), a disappointing trend. A similar decline is evident in other surveys such as the World Economic Forum’s Global Competiveness Report where Australia is now ranked 20th.
Figure 15: Doing business rankings 2012
| 1 | Singapore |
| 2 | Hong Kong |
| 7 | United Kingdom |
| 8 | Korea |
| 9 | Iceland |
| 10 | Ireland |
| 11 | Finland |
| 12 | Saudi Arabia |
| 13 | Canada |
| 14 | Sweden |
| 15 | Australia |
| 16 | Georgia |
| 17 | Thailand |
| 18 | Malaysia |
| 19 | Germany |
| 20 | Japan |
Source: Merrill Lynch. The ‘Doing Business’ rankings are based on assessments of the cost (in money and time) of regulations affecting 11 different areas of the life of a business, across 183 economies. Source: World Bank & International Finance Corporation, Doing Business 2012 (and previous reports)
Weak productivity, rapid income growth and a high Australian dollar has led to a high cost structure economy.
Since 2000, Australia’s manufacturing unit labour cost growth (in US dollars) has been 3.6% pa, the fastest in the advanced economies (Figure 16).
Figure 16: Manufacturing unit labour costs US dollars ($)
Source: OECD
Average hourly compensation in the manufacturing sector is US$41, placing us tenth globally (Figure 17). This is in stark contrast to the US$1 cost in China and India and close to double hourly wages in Korea, Singapore, New Zealand and Greece. Australia has the third highest minimum wage.
Figure 17: Hourly compensation costs in manufacturing 2010
| 1 | Norway | 57.53 |
| 2 | Switzerland | 53.2 |
| 3 | Belgium | 50.7 |
| 4 | Denmark | 45.48 |
| 5 | Sweden | 43.81 |
| 6 | Germany | 43.76 |
| 7 | Finland | 42.3 |
| 8 | Austria | 41.07 |
| 9 | Netherland | 40.92 |
| 10 | Australia | 40.6 |
| 11 | France | 40.55 |
| 12 | Ireland | 36.3 |
| 13 | Canada | 35.67 |
| 14 | United States | 34.74 |
| 15 | Italy | 33.41 |
| 16 | Japan | 31.99 |
| 17 | United Kingdon | 29.44 |
| 18 | Spain | 26.6 |
| 19 | Greece | 22.19 |
| 20 | New Zealand | 20.57 |
Source: US Bureau of Labor Statistics
Not surprisingly, the US Department of Labor Statistics finds Australia is the third most expensive country in the world. For US$1 spent in the United States, in Australia the equivalent purchase requires US$1.40.
We can also see this in our high ranking on the Big Mac (6th) and the IKEA Billy Bookshelf (4th – Figure 18) indices, two of the most widely purchased consumer goods globally.
Figure 18: 2011 IKEA Billy bookshelf catalogue price
US dollars ($)
| 1 | Israel | 85.77 |
| 2 | Dominican Rep. | 76.11 |
| 3 | Saudi Arabia | 73.33 |
| 4 | Australia | 71.58 |
| 5 | Japan | 70.58 |
| 6 | Canada | 66.28 |
| 7 | China | 66.15 |
| 8 | Turkey | 65.51 |
| 9 | Hong Kong | 64.22 |
| 10 | U.S. | 59.99 |
| 11 | Norway | 59.21 |
| 12 | Russia | 58.60 |
| 13 | Singapore | 58.45 |
| 14 | Iceland | 58.34 |
| 15 | Switzerland | 58.19 |
| 16 | Taiwan | 56.27 |
| 17 | Sweden | 54.14 |
| 18 | Czech Rep | 51.58 |
| 19 | Austria | 51.36 |
| 20 | Slovakia | 51.30 |
Source: Bloomberg
While Australia’s economic performance has been outstanding in the past decade, cracks are appearing. Our current high standard of living is under threat from the high cost/low productivity trend which has developed over the past decade.
Australia’s free kick delivered from consistently higher commodity prices is now a thing of the past.
Complacency has set in. In the early days of enterprise bargaining, the mantra was trading productivity gains for higher wages, but this has been absent for most of the past decade. The commodity price boom made it easy for widespread growth in real incomes and profits, but this won’t be the case in the period ahead. Corporate Australia is only just now waking up to this new reality.
There are two paths the economy can follow in the years ahead. It can continue to cruise along for a time yet, but the lack of competitiveness will eventually bite. Or, we can start to address the impediments to productivity, such as the infrastructure deficit, a lack of a true national market, the regulatory burden, declining education standards and an appropriately balanced industrial relations system.
Let’s hope we don’t have to wait for a crisis this time to face up to the changes necessary to maintain our place on the podium.
Mark Rider is Head of Investment Strategy, Australia with UBS Global Asset Management. He is a speaker at the 2013 Markets Summit (19 February 2013).