Australia’s economic outlook | interest.co.nz
There’s a long history kiwi emigration to Australia. But it’s very up and down.
For many years annual net migration across the ditch exceeded 20,000, peaking at nearly 44,000 in 2012. However, it dropped off dramatically from 2014-2020 and even reversed briefly during the height of the Covid-19 pandemic.
Since then, the net migration loss to Australia has been rising again. It was about 6,000 in the year to March 2022 and more than 17,000 in the year to March 2023.
Of course, New Zealand has had an election since then. The fall of an unpopular government may stem the rising tide of kiwis crossing the ditch. Or perhaps the identity of those leaving will just change from National and Act supporters to Labour and Greens supporters.
One of the key determinants of trans-Tasman migration is whether Australia offers kiwis the hope of better jobs and/or higher pay. This is linked largely to relative economic performance.
So what’s the economic outlook for Australia at the start of a new year?
Inflation has peaked and is on the way down. The Midyear Economic and Fiscal Outlook (MYEFO) released by the government last month forecast CPI growth of 3.75% in the year to 30 June 2024. Importantly, the latest figures from the Melbourne Institute recorded a continuing fall in the inflation expectations of consumers.
Interest rates are also at or near their peak. Commentators are divided as to whether the Reserve Bank of Australia (RBA) will raise the cash rate one last time. However, there is a consensus that the RBA will begin cutting rates later this year or early next year. While the thirteen rate rises over the last two years have had serious consequences for some borrowers, the dire prophecies about the ‘mortgage cliff’ have not eventuated.
A key contributor has been the resilience of the labour market. Unemployment remains at historically low levels despite high immigration. According to the latest data from the Australian Bureau of Statistics, unemployment was at 3.8% last November. Forecasts in the MYEFO show unemployment rising to 4.25% this year and peaking at 4.5% in 2025.
Significantly, real wages are growing again.
Recent GDP growth has been reasonable relative to comparable countries, but it’s been driven primarily by mining exports (Australia’s perennial saviour) and massive immigration. Indeed, on a per capita basis GDP has fallen in the last year.
Going forward, the forecasts are satisfactory but not inspiring. The MYEFO projects GDP growth of just 1.75% in the current financial year, rising to 2.25% in 2025. Again, immigration and mining exports will contribute much of that growth.
The resources sector is the gift that keeps on giving to the Australian economy. It underpinned the government budget surplus last year and looks like doing the same in the current year.
However, even the revenue windfalls generated from iron ore and coal, gold and gas, may not be enough to save the Australian budget in the medium term. The pressures on the expenditure side are mounting.
As in New Zealand those pressures include servicing the debt taken on during the Covid-19 pandemic and the rising cost of caring for an ageing population. But two other items loom large in the Australian budget – defence and the National Disability Insurance Scheme (NDIS).
Australia will spend more than $50 billion on defence in the current year. The MYEFO forecasts average annual growth above 6% for the next decade. And beyond that the country has committed to spending hundreds of billions of dollars on the acquisition of nuclear-powered submarines.
Advanced weaponry is an expensive business as Winston Peters will discover if the new NZ government carries through on its commitment to enhance the country’s defence.
The irony is that much of Australia’s defence spending is directed at the perceived threat of China, and much of the revenue to fund that spending comes from exports to the Chinese.
Australia’s NDIS is a scheme to provide funding for people with permanent and significant disabilities. Since its establishment just a decade ago, it has grown to a $40 billion item in the budget. The MYEFO projects NDIS average annual growth of more than 10% for the next ten years. That rate of increase creates obvious sustainability issues.
The government’s major expenditure commitments highlight the importance of economic growth. And relying on immigration and mining exports for that growth is risky. The best long-term solution is increased productivity. As Paul Krugman said, ‘Productivity is not everything, but in the long run, it’s almost everything.’
And Australia doesn’t have a good story to tell about productivity.
Last year, the Australian Productivity Commission released a report entitled 5-year Productivity Inquiry. That report included the following graph showing productivity growth in the last six decades.
Source: Australian Productivity Commission
The period since 2000 has witnessed a disturbing decline in productivity growth. The trend is ominous and recent governments have done little to reverse it. Except for the introduction of GST in 2000, there has been no major economic reform since the 1983-96 Hawke/Keating government. The graph illustrates the consequences.
Another recent report, Barriers to collaboration and commercialisation, from Industry Innovation and Science Australia, stresses the productivity problem and also the lack of complexity in the Australian economy. It cites a fascinating and troubling analysis from the Harvard Growth Lab (HGL).
That analysis compares the level of ‘economic complexity’ across a range of countries. It notes that ‘Australia is less complex than expected for its income level’. That’s a polite way of saying that compared to similar developed nations the lucky country is too dependent on digging stuff out of the ground. It needs more sophisticated value-add manufacturing activity.
The consequence for Australia, according to HGL, is that ‘its economy is projected to grow slowly.’
Remarkably, HGL ranked Australia 93rd for economic complexity out of the 133 countries analysed in 2021. That was down from 55th in 1995.
By comparison, New Zealand was ranked 52nd in economic complexity, down from 33rd in 1995.
Most kiwis considering a shift to Australia don’t concern themselves with such medium-term developments. Their focus is on current pay rates and house prices.
On that basis, unless the Luxon government can turn things around quickly, there’s a risk of a return to the days of a net 20,000 plus kiwis moving to Australia each year.
*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our ‘Understanding Australia‘ series.