Australians bemoaning the state of the economy should cast their minds back to 1990 and “the recession we had to have”. Negative growth started in the September quarter of that year and lasted until the September quarter the following year. During that severe economic downturn – the worst since the Great Depression – GDP fell by 1.7 per cent and employment by 3.4 per cent. In fact, the unemployment rate rose to 10.8 per cent and did not begin falling until late 1992.
To complete this picture of economic malaise, remember the Victorian and South Australian state banks collapsed, as did the Teachers Credit Union of Western Australia, the Pyramid Building Society in Victoria, and several merchant banks.
Twenty-six years later, Australia has not slipped back into another recession – the longest period of continuous economic growth in our history. There have been crises along the way – the Asian financial implosion of 1997, the tech wreck of 2000, and the global financial crisis in 2008 – but our economy has been resilient enough to remain in positive territory. The economic medicine we took in the 1980s and 1990s even inoculated us from the GFC, in stark contrast to most developed economies.
Still, the naysayers persist in talking down our economy today. There’s no doubt we have our economic issues, what country doesn’t? Under-employment could be lower, wages growth is at a record low, and the inflation number is still too low. As for economic and tax reform to bring us into the 21st century, well, that’s like the dodo bird – extinct.
It’s also not just external shocks. The paltry 0.3 per cent growth in the March 2017 quarter reflected, in part, the fallout from Queensland’s cyclone Debbie and unseasonably high rain across the entire eastern seaboard, hurting construction and retail sales.
Yet somehow the Australian economy continues to perform. After the GFC, it was investment in the mining industry, on the back of expected demand increases from China, that gave us the fillip we so badly needed. When the mining boom imploded, it again seemed the glass-half-empty brigade were right, yet as the dollar fell with commodity prices, other sectors of the economy started to kick in, such as construction, tourism and education. Notably, the Victorian economy, derided as part of the rust belt as manufacturing declined in the 1990s and noughties, is more than holding its own, as is New South Wales’. The two-speed economy, that phrase which became part of our lexicon when Queensland and Western Australia had mining-fuelled surges, is still with us, except it’s now those mining states that are in second gear. And even they are improving.
The mining sector is not all doom and gloom. Although investment is well down, it is still above its long-term trend of about 1.5 per cent of the GDP. In addition, many of those projects that came to fruition during the boom and underpinned much of that record capital investment are now onstream and earning export dollars. This particularly applies to natural gas projects.
Boons and silver linings
What’s providing the silver lining from this sector is higher prices for our major commodity exports, such as iron ore, gas and other minerals. A higher dollar is not helpful, but it does reflect a market sentiment bullish about commodity prices. Then there is improving tourism. In the 10-year period to December 2016, Australia’s fastest-growing tourist numbers were from China and India, a welcome trend that shows no signs of abating.
There are other factors at play. The states continue their infrastructure spending, especially New South Wales, on the back of the sale of public assets. This project work not only brings immediate activity, longer term it also provides the infrastructure we so badly need to modernise our economy.
Finally, the end of the reporting season leaves room for optimism. Although it was resource companies that did much of the heavy lifting, there were some interesting numbers across all sectors. First, nearly 60 per cent of companies reported higher profits than a year ago, while 45 per cent exceeded their profit projections. Second, 80 per cent of companies either maintained or increased their dividends, reflecting their confidence in the economy and putting a smile on the faces of their individual and institutional shareholders.
It’s easy to paint a picture of doom and gloom, especially at times of geopolitical uncertainty. And low wages growth is denting consumer confidence. But my glass remains half full – as does much of corporate Australia’s (as reflected in improving employment market and business sentiment indices), despite the near total absence of a cohesive policy agenda out of Canberra.
George Lucas is managing director of Instreet Investment.
