The Australian Financial Review
President, Business Council of Australia
The recent financial crisis reinforces two economic insights that should matter to all Australians. The first is that volatility is an inherent part of life in today’s global market economy. The second, just as important, is that Australia need not be ranked among the most volatile of the world’s economies. With good policy settings, our nation can escape the worst of the boom and bust cycle.
The most remarkable fact about the past year is that we have avoided the worst effects of a severe global downturn. This week’s stronger IMF growth forecast confirms we are in solid recovery. Indeed, Australia’s economic system has shown a robustness over the past decade and a half that would have surprised most economic forecasters in the 1970s or 1980s.
Back in 1995, Australia’s economy was among the most volatile in the developed world. We had recently emerged from a recession that had driven unemployment above 10 per cent for the second time in a dozen years. The economy had gone through wild swings in property and share prices and interest rates over the previous decade. It was often observed at the time that whenever the world sneezed, Australia’s economy caught a cold.
So the past 15 years represent a remarkable turnaround in Australia’s economic performance. First we sailed through the 1997 Asian economic crisis when many thought it would swamp us. Then we withstood the bursting of the tech bubble in 2000 better than most Organisation for Economic Co-operation and Development nations. And in the current world slowdown, we seem likely to escape with no technical recession.
Australia’s unemployment rate tells the story most eloquently: Australian unemployment remains below 6 per cent at a time when more than one in 10 US workers is out of a job. For the first time in a quarter-century, Australian unemployment has fallen clearly below that of the US.
Yesterday’s rising inflation figure and expectations of official interest rate rises reflect the same story of an economy returning rapidly to normal.
There are many explanations for the Australian economy’s new resilience. The Chinese economy, with its robust continuing need for resources and its leadership’s determination to keep its own domestic economy growing strongly, played its part. So did our federal government and Reserve Bank, with their swift easings of policy to forestall an Australian collapse. But the cumulative reforms by successive governments over the past 25 years were vital – the opening of our economy to world trade and investment, reforms to our financial system, to tax, to superannuation, to workplace relations, and a variety of other productivity-boosting measures.
So while the end of the first decade of the 21st century may be provoking a bout of economic hardship and policy introspection in New York and London and Madrid, in Australia we have the opportunity to refocus on further reforms to sustain our economic performance for the longer term. This is the underlying economic message in the Prime Minister’s speeches over the last fortnight, with their welcome emphasis on raising productivity.
Australians should better understand the scale of our economic successes. If the trend is the good news for well-run market economies, then Australia’s trend over the past 15 years has been remarkable. We have not only created a net 2.8 million new jobs, but also raised average real incomes by almost half. And contrary to stereotypes, the benefits of the past 15 years have been relatively widely shared across our community.
But we would do well to avoid hubris about this record.
For one thing, economic growth is not the only prosperity a nation needs. We need social prosperity – jobs for all those willing to work, a clean environment, better education and health systems, a vibrant cultural life, stronger communities and all the other hallmarks of the good society. Here we have achieved much but have much more yet to do.
And of course, avoiding recessions for fifteen years does not guarantee success in the next 15. Australia has experienced long booms before, notably the 30-year boom that started in 1861. But that boom ended in the brutal downturn of the 1890s.
Despite Australia’s success in this crisis, it is nevertheless a warning to us. Our nation can and should take more steps to insulate our economy against the harshest winds of the global business cycle. The economy is vulnerable to declines in commodity prices and too reliant on offshore funding. Government debt needs to be pushed back down as fast as possible now that the upturn has arrived. Australia still has a pressing need to bulwark itself against future economic shocks.
Australia must also find ways to expand its productive capacity, so that we can continue to grow without running up against economic speed limits of our own making. And Australia must ensure we have the smart, skilled and productive people and the labour flexibility to keep innovating in a dynamic global economy.
For Australia’s economic system, the issue is not whether the system will survive this crisis. Our challenge is to learn from the crisis – and to make our prosperity more sustainable and accessible to more Australians.