Australia | Jun 10 2008
By Greg Peel
Prior to 2005, Japan was Australia’s second biggest trading partner, with the US coming in second. In 2005, China surpassed the US. In 2007, China surpassed Japan. Total trade with China has grown three-fold in just six years, and now accounts for 15% – up from 5.7% at the start of the century. China now buys 15.4% of Australia’s exports, and 14.5% of Australia’s imports now come from China.
“The sharp lift in the economic importance of China is the biggest change to the Australian economy in around forty years,” suggests CommSec’s chief equities economist, Craig James. “And with industrialisation in its infancy, China’s importance to the Australian economy will grow substantially in coming years”.
Forty years ago marks a similar emergence of Japan as a globally powerful economy in the wake of World War II. Japan’s industrialisation began around 1950 and continued right up to around 1980, and Australia was similarly a beneficiary of this growth as Japan sucked up Australian iron ore and sent it back to a willing customer base in the form of Toyotas . Yet China’s emergence is delineated by one important, and oft underappreciated, factor. In 1950 there were 100 million Japanese. In 2008 there are 1.3 billion Chinese. Were there a simple proportionate relationship between the two, growth in the Australian economy should be thirteen times larger as a result of Chinese emergence than of Japanese emergence.
Not that it’s that simple, but the ramifications cannot be underestimated as far as Craig James is concerned. Japan is still a trading partner of great importance, and only today the prime minister has announced a new deal to build hybrid Toyotas in Victoria. The US, on the other hand, accounted for 16% of Australia’s trade earlier this century, but has since slipped to a record low 9.4%. China’s growth is set to place a great strain on the world’s natural resources, of which Australia is a major producer.
While India also gets a lot of attention, India actually only accounts for 3% of Australia’s trade at present, up from 2.5% three years ago.
At the same time as China’s economy is emerging, Australia’s population is growing at a record rate. Last year the population grew by around 322,000 to over 21.1 million – the fastest growth rate since European occupation. More babies were born in 2007 than ever before, and at 285,000 the figure broke the previous record set in 1971. A migrant influx of 184,000 in 2007 was also the highest ever, exceeding the record numbers set in the great European influx of 1949-50. It was the previous government’s policy to rapidly increase the population by introducing the baby bonus and increased skilled migration. The new government has willingly accepted the baton.
The importance of a fast-growing population cannot be underestimated either, notes James, as a growing population has a multiplier affect across multiple sectors of the economy.
It is easy to assume today that skilled migrants are mostly needed because of the shortage of workers in the burgeoning mining industry – another reflection on China. But while influential, this is not the simple case. The simple case is that the previous government began to take action to counter the effect of Australia’s inevitably ageing population. The previous Labor government introduced compulsory superannuation for the same reason. The ratio of Australians aged between 20-30 in the workforce has now fallen to its lowest ever level of 20%, down from 26% in the 1970s. In 2012 there will be more Australians aged 65 and over than aged 20-30 – the job-seeking age bracket. Today’s population policies are not predicted to increase the low ratio of young workers until 2027.
The states of Victoria and Queensland experienced their biggest population gains on record in 2007, while Queensland had the largest absolute gain. South Australia equalled its previous record, while Tasmania and the Northern Territory also chimed in. While the rule of thumb is that most New Australians eventually find their way to Sydney, New South Wales is not currently seeing record population growth.
This is consistent with the dwindling leadership of the NSW economy. At the start of the century, NSW accounted for 32% of the national economy, but that figure has now slipped to 27.5%. Unsurprisingly, the big gainers have been Queensland (18% to 21%) and WA (12.5% to 16%). Queensland is now challenging Victoria as Australia’s second largest state economy. At current relative rates of growth, Queensland should surpass Victoria in 2012 and WA should pass Victoria in 2014. Such state position changing takes place very infrequently, notes James. The last was in 1983 when WA stole fourth from SA.
You would have to have come down in the last shower not to appreciate that growth in Queensland and WA is all about mining, however the numbers don’t actually bear this assumption out. Currently the mining industry accounts for only a mere 6.8% share of Australian total industry, and that figure is actually down from 7.9% in 1997.
Surprised?
You should be if you consider that the resources sector now accounts for about 25% of Australian stock market capitalisation, not even including the energy and mining services sectors. It just goes to show how much share market value is attributable to movements in commodity spot prices rather than actual earnings. The reason why the mining sector contribution is so low is because of infrastructure constraints – the mining industry is simply struggling to get its goods to market.
Which is also why, despite several years now of mining boom, Australia’s trade balance has only just begun to swing back in favour of exports, despite the higher Aussie dollar. But James points out that such a lag between a mining “boom” and the actual related increase in output has a long history. Mining industries do not just expand overnight. It can take years to respond sufficiently to increased demand – another reason why China’s growth is so important to the ongoing growth of the Australian economy.
Australia’s biggest industry sector at present is property & business services at 11.7%. Second biggest might also be a surprise, being manufacturing at 10.0%, then followed by finance & insurance (8.1%) and construction (6.8% – equal to mining).
The consistently fastest growers in recent years, and obviously mining isn’t one of them, are construction, transport, communication and finance & insurance. Within the next five years, manufacturing is likely to be usurped by all of finance & insurance, construction and mining. Transport & storage has been one of the surprise packets in recent growth terms, benefiting from both population and mining growth.
While the economy has been booming, Australians have been getting richer. The 9.4% increase in real disposable average income in 2007 was the highest in 17 years. Despite all the hullabaloo over food and petrol prices, the 9.1% growth in real income from March 07 to March 08 far outweighed the 3.2% increase in the cost of consumer staples.
Indeed the proportion of income spent on “essentials” (food, alcohol, clothing, household items and transport) now accounts for only 35% of total household spending – down from 45% 20 years ago. The balance comes from an increase in spending on computers and other gadgets, personal care products, household appliances, pharmaceuticals, and insurance & super. Surprisingly, spending on petrol has remained fixed as a proportion (3%) for 20 years. This indicates we must have balanced the rising cost of petrol with more efficient use of it. And just to prove the whole “rising rent” problem is no more than a real estate agent beat-up, imputed rent on housing has also remained static (17%) for 20 years (this figure includes equivalent “rent” paid by owners of one’s own home as mortgage payments).
So what does it all mean for investors?
The falling ratio of young Australians to old will ensure the labour market remains tight, and unemployment remains at levels of 3-4%, for some time yet, notes James. This will mean employers need to devote a lot of time and effort into attracting and keeping employees. The rising rate of immigration will help the problem, and were Australia to not increase immigration the economy would slow and the standard of living fall.
However, if Australia continues to add 300-400,000 to the population each year tremendous pressure is going to be placed on land, water and energy resources. Australian governments have been lagging on sustainability issues while pushing immigration and procreation. More people means more homes, roads and social infrastructure. Construction is becoming the most important sector, as governments at the federal and state level announce massive infrastructure spending. Transport is another sector that will grow in importance.
At current growth rates it is conceivable, notes James, that the economies of Queensland and WA could pass that of NSW in a decade.
The Australian consumer should continue to benefit from real income gains in a tight jobs market as prices fail to keep up with wage rises. The cost of housing should not present a major problem in this scenario. Apart from current blips, the Australian consumer should continue to devote less of the household budget to essential goods and more to discretionary items and services.
Let’s just hope China doesn’t stumble.