Australia recently broke the world record for the longest unbroken period of growth since GDP records began. 2015 was the 24th year in succession that Australian output was positive, but all is not well Down Under, despite the headline figures, writes Finbarr Bermingham.
Years of structural neglect have led to a real imbalance in the Australian economy, and the country’s export concentration is now posing an existential threat to its economic health, according to a leading trade economist.
Andrew Charlton, former senior economic adviser to the Australian government and director at AlphaBeta Advisors, a consultancy, spoke at GTR’s Australia Trade and Supply Chain Finance conference in Sydney in March, where he compared the local economic structure to that of an impoverished nation, such as Bolivia, Botswana or Peru.
In the decade-long commodity price boom, which saw China consume the vast majority of Australian minerals such as iron ore and coal, the country not only became one of the wealthiest in the world, but experienced one of the most spectacular spikes in wealth in the history of civilisation.
However, successive governments pursued a strategy of further concentrating the exports base in favour of these sectors, in the hope that the boom would last forever. The past year has shown the folly of such thinking.
In the decade to 2015, Australian commodities averaged growth of 310% – a truly remarkable ascension, the likes of which have not been seen since the gold rush of the mid-19th century.
The Chinese government was investing 47% of its GDP in infrastructure projects in 2010. China’s expenditure was, said Charlton, “capital expenditure on a scale the world has never seen”. In the years from 2011 to 2013, China used more cement than the United States used in the entire 20th century.
This unprecedented expansion was complementary to Australia’s strengths and the country’s resource exports grew from 30% of the total trade basket in 2000 to 52% in 2015.
However, the fall away in China’s domestic investment has stopped the growth in its tracks. By 2020 that figure will have fallen to 39% – still a large figure by any government’s reckoning, but a huge decline nonetheless. For every 1% decrease in China’s investment ration, Australia will lose 0.2% of its GDP growth.
Australian commodity prices have fallen by 57% over the past two years, while its terms of trade – the amount of import goods an economy can purchase per unit of export goods – has fallen by 32%. The slide in the value of the Australian dollar plays into this scenario, but the main culprit is the decline in China.
Chinese steel production and consumption, for instance, peaked last year and will fall by 27% in 2016. This is disastrous for a country which has ploughed so many resources – both human and capital – into iron ore production. The giant Roy Hill mine in Pilbara, Western Australia, for instance, has only just started producing, adding further produce to a market bursting with surplus.
Mining giants such as Rio Tinto, Vale and Glencore have for some time been pairing up in an effort to pool resources and weather the storm. But for small producers, the game has been up for some time.
Charlton’s view is that the overall economic picture in Australia is much bleaker than GDP statistics suggest. According to the Reserve Bank of Australia, the country grew by 3% last year, however with the huge increase in investment in Australian mineral and agricultural assets from China, this figure is skewed and is not representative of the actual picture.
GDP growth measures only volume: so a farm owned by Chinese investors that exports A$500mn per year adds that amount of capital to the Australian GDP figure, even though the money is likely to go to China.
Some economists have long bemoaned and discouraged GDP evangelism, since it only measures pure output, no matter what form that output takes. The Deepwater Horizon oil spill in the Gulf of Mexico in 2010, for example, actually added to the US GDP of 2010 and 2011 due to the resources spent on the clean-up effort.
Charlton advocates the use of Real Net National Disposable Income (RNNDI), which is adjusted for the fall in volume or proportion of exports accrued to foreign ownership – an element of the Australian economy which is set to escalate with the signing of a series of free trade agreements over the past number of years. This, he claimed, would allow for a much more accurate representation of Australia’s economy.
While the GDP data looks relatively positive still, RNNDI has been languishing sub-zero since the mining boom broke in 2015. This is set to continue, given the lopsided nature of Australia’s economy and the fact that there is unlikely to be any recovery in commodity prices any time soon.
Once-booming industries such as wine and pharmaceuticals were non-priorities under successive governments, and as such, lost their positions in the global markets to competitors from South America, in the case of wine, and South Asia, in the pharma market. “Once an export market is lost,” Charlton said, “it takes a long while to get it back.”
Is the grass still greener?
Australians are notoriously chipper and self-deprecating, but even with the smiles and jokes at GTR’s conference, the pessimism was clear.
Panellists discussing Australian agriculture were also fairly downbeat, but the main reason was one which is arguably out of their hands (though many climate experts would disagree): adverse weather conditions caused by a stronger than usual El Niño remain the biggest issue facing Australian agribusiness.
This is despite the fact that authorities have posted positive forecasts for the coming year, in which Australian agricultural production is set to top A$60bn for the first time in history.
El Niño 2015 was the strongest since 1997. Along with that year’s phenomenon and that of 1982, they are the three worst instances of the past 50 years. Drought and heatwaves hammered the yields of many crops, with the wheat harvest cut by 5.1%.
Delegates and speakers were united in the view that this was the biggest challenge facing the sector.
The slowdown in China has not had the same impact on agricultural commodities as it has had on energy and metals, said John Reeve, director at AgRee Commodities, although general export levels are down across the board.
Meanwhile, the series of free trade agreements the Australian government has been signing and negotiating will eventually have a positive impact on the market (although they will serve no doubt to dilute Australian ownership of key farming assets, thereby detracting further from RNNDI, as discussed), but it will take a number of years for this to trickle down, given the progressive nature of the tariff removal in each of the deals.
Across Asia, Australian livestock in particular is viewed as being the blue-riband product. In restaurants from Indonesia to Singapore, from India to Beijing, Australian steak is notably higher priced than local meat, demonstrating the high regard for Australian agriculture. A 12-ounce ribeye at the Australian themed Wooloomooloo steakhouse in Hong Kong, for instance, will set you back HKD400 (about US$52), or HKD100 more than an Argentinian cut just down the road.
Tobin Gorey, director of agri-strategy at Commonwealth Bank of Australia said that this will continue as consumers in Asia graduate to middle income levels, in a trend he’s coined “the dining boom”. This will be particularly keenly seen in China, with which Australia has recently agreed a free trade agreement. According to research by PwC, consumption of meat in China has quadrupled since 1971.
Previously a rural economy, China’s scale of urbanisation in recent decades has been astronomical, meaning the government has had to forget about self-sufficiency and look to imports to feed an increasingly insatiable appetite for meat.
The report reads: “China is venturing overseas to bolster its food security through investments in foreign farmland and the acquisition of companies across the broader food value chain. This is where the global impact of China’s increasing food needs will be felt most acutely.”
This issue is already being borne out in Australia, much to the chagrin of certain political areas.
In February, the Chinese company Moon Lake Investments bought Australia’s biggest dairy farm, the huge Van Diemen’s Land Company estate in Tasmania. Late last year, the Australian government intervened to stop a group of mainly Chinese investors from buying a portfolio of farmland the size of Kentucky, citing national interest.
Bob McKay, a veteran of the Australian soft commodities scene and current director at Full Profile, an agricultural commodities solutions provider, reflected the views of many when he said that for the most part, investment is welcome, but that the Australian government needs to tread carefully in order to avoid a dilution of ownership, which would lead to much of the capital generated by foreign-owned farms leaving the country.
The Australian government is faced with a huge challenge, which is to diversify or die. It’s a story played out around the world, from Russia to Brazil to Canada, where resource-rich countries have made hay while the sun shone high in the sky for so many years. Now though, there’s not a gap in the clouds. It’s time for Plan B.