Bulk up or suffer a US boxing

The US is on the verge of having a huge edge over Australia in several key economic drivers, including labour and energy costs. It's time for Australia to get itself into shape for the looming contest.

Australians have rarely seen the US as a rival. But now Australians will need to understand that because the US has a remarkable combination of low energy costs, low labour costs, high productivity and abundant capital, life Down Under is going to be tougher.

In the next few months you will hear nothing else but fiscal cliff from the US but underneath that fiscal cliff is this enormous American strength, which will transform the US in coming years.

Australia, in the face of this new environment, is going to struggle. And let me illustrate our problem with a series of graphs, which I published way back last March. But they are just as relative now as they were back then.

The most frightening graph is the graph of Australian labour productivity against US productivity.

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We have simply dropped the ball and there is no sign that our chief executives, in their labour agreements, understand what has taken place. Certainly the unions do not and it’s all too hard for the residents of Canberra – whether they be public servants or politicians.

But in time they will understand because the United States will be an even more aggressive competitor against Australian services and manufacturing – and I emphasise services. And at the same time America is manipulating its currency downwards to gain an even greater advantage over places like Australia

Australia’s real growth in the last decade has been driven by an increase in the terms of trade, which is effectively an increase in commodity prices. The graph below shows that trend.

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The discovery of vast amounts of oil and gas energy in the US and Iraq is going to lower energy prices and will affect both our gas exports and our coal exports.

Iron ore may perform better but even there the boom days are over. That means our terms of trade will fall, and given what has taken place in our productivity so will our economic environment toughen. Wayne Swan’s decision to abandon a 2012-13 surplus means it is going to be extremely difficult to gain a surplus in coming years without major surgery. The 2013 election may be a good one to lose.

In many ways the 2013 election campaign will be a strange mirage as politicians on both sides avoid the looming truth. And very few of the major high-cost promises that will be made in the next election campaign will be delivered (A mining boom cut-off is coming, May 12).