Australia gets the economic jitters

WHAT WOULD Minister for Finance Michael Noonan give for an economy enjoying its 21st year of consecutive growth, with an unemployment rate of 5 per cent and a fiscal account hurtling back into balance?

How about US treasury secretary Tim Geithner? What would he do for a monetary policy environment that would permit interest rate cuts of hundreds of basis points to stimulate demand?

This ideal, unattainable in the US and Europe, is a reality in Australia, where this week federal treasurer Wayne Swan was able to describe the economy as “simply outstanding”.

Yet to speak to Australians would give the impression that Swan was horribly out of touch – a lone bull in a bear market. On a recent trip to Sydney and Melbourne, I heard nothing about Australia’s growth outperforming that of every other developed nation, but a lot about crashing commodity prices, a soaring Australian dollar, an overreliance on China, a property bubble set to burst and job losses in manufacturing.

Is one of the globe’s most solid economies teetering on the edge of a cliff or are Australians uncomfortable with being world- beaters? Has the lucky country become the anxious one?

What is incontrovertible is that while the economy has been growing quickly – at 3.7 per cent year on year in the 12 months to June, compared with an annual average of 2.6 per cent in 2007- 2011 – the growth has been uneven.

A planned focus on the mining sector has seen the extractive industries expand by 4.9 per cent in the past year, but the manufacturing sector shrink by 3.1 per cent.

The policy response from the centre-left Labor Party government to the weak secondary sector has been tepid. Retaining its union support has necessitated some piecemeal support for struggling car manufacturers, but deep down the government acknowledges that Australia no longer enjoys comparative advantage in producing vehicles and consumer durables.

Its move towards mining was unsentimental and economically sound.

This, however, has not helped to quell the anxious mood. As mining requires lots of capital and relatively few workers, while manufacturing needs little capital but lots of labour, the media has been able to run daily stories on redundant car-plant employees but very few about big hires in the Pilbara.

This has created the impression that the economy is too reliant on the mining sector and, by extension, on those countries that buy its commodity exports.

It also explains why every moderation in Chinese growth is interpreted as a sign of impending doom in Sydney.

For all the distress that the two-speed economy has caused non-mining industries, the government has been able to defend its economic policies by pointing to the rapid rate of income growth, generated by high commodity prices.

However, the Reserve Bank of Australia’s index of commodity prices has been in decline for a year, as a result of weak economic conditions around the world.

In response, large mining firms have cancelled several proposed projects, such as BHP Billiton’s US$30 billion (€23 billion) extension to its Olympic Dam copper and uranium mine, leading resources minister Martin Ferguson to declare the resources boom over.

The sight of the mining sector – the industry for which others have been making way – starting to struggle has only clouded consumer sentiment further.

There are reasons though to believe that Ferguson is wrong. The RBA’s index is falling, but only from record highs. It remains 20 per cent above the average level in 2008-09. Any discussion of the tumbling global price of iron ore has to be understood in this context.

In addition, the value of the resources projects currently under construction in Australia is about A$250 billion (€201 billion), equivalent to almost 20 per cent of GDP. Far from being over, the final, most productive stage of the resources boom is yet to begin.