Our Asian future requires a change of mind
For Australia, the Western culture attached to Asia, this is viewed as a fabulous opportunity to enhance our already prosperous existence, while other Westerners such as Europe and the US slowly fall by the wayside.
For Australia, though, the Asian Century might be already over after just 13 years. Asia's major asset is the sheer number of people in the region, otherwise there is virtually no country in the region that has the right mix of political structure and economic dynamism to meet the expectations being floated. Asia has about 60 per cent of the world's population but contributes only about 20 per cent of the global gross domestic product (GDP). The driving force, China, has through its centralised government dramatically brought forward the first stages of its development and overspent on a range of capital items. This was the sweet spot for Australia and now the game has changed.
The outcome is not a disaster for Australia, but a structural shift is on and we must be sure to capitalise on it rather than throw our hands in the air and blame the government.
Australia's gross domestic product is about $1.4 trillion. Far and away the biggest contributor is our services sector, which equates to nearly 70 per cent of GDP. Our export sector, dominated by mining and agricultural products, is slightly under 20 per cent of GDP. China's insatiable appetite for commodities has seen commodity prices rise, forcing the local currency higher, wages to spike and interest rates to remain higher than virtually every other Western nation. In economic terms this is called crowding out. The booming mining sector has crowded out the remaining private sector of Australia and made many sectors expensive and uncompetitive.
This crowding-out phenomenon is now coming to a close. The dramatic drop-off in mining spend, which will continue through until 2017 when the coal seam gas projects in Queensland end, will see lower interest rates and the local currency migrate towards its long-term average of around US75¢ to US80¢. This equation will help a range of service industries such as education, tourism, manufacturing and housing.
Just how fast and how far the mining sector will fall is difficult to say. In recent years the sector has contributed about four times its long-term average to Australia's GDP. Cuts to spending in the mining world have been dramatic in recent months and there is very little if any chance it will recover in the next three to four years.
China, the main buyer of our products, has dialled down its growth and its appetite for resources is declining by the day. Meanwhile, Japan, our second largest trading partner, is in the last throes of a desperate attempt to reboot its economy. It may work in the short term, but the dynamics of the Japanese economy and society mean the country is now heading towards Second World status.
With interest rates and the local currency lower, Australia will travel back to a more balanced economy with less growth emanating from Western Australia and north Queensland and more coming from the services sectors domiciled on the east coast of the country.
To take advantage of these changes, we must have policies that accommodate domestic growth, generated by the local economy and not by exports. The key industries are housing, retail, education, manufacturing and tourism. All these sectors require better infrastructure, more competition, less regulation and, dare I say, a population policy that results in more people around the globe wanting to come and live in Australia.
While increasing the local population is not always an easy subject for many to comprehend it is a proven way to boost economic growth. If we slowed population growth, we would quickly slump into the sort of funk currently being experienced by other developed economic zones such as Japan and Europe.
People will point out that other nations, such as China, enjoy strong economic growth without massive population growth. The reality is China and other developing countries have low incomes and terrible productivity rates, both of which can be quickly improved.
The best and most sustainable global growth story over the past 150 years has been the US, where the population has gone from slightly over 17 million in 1840 to approximately 314 million today. The US has taken people from all over the globe and become an economic powerhouse unmatched by anyone. In the short term the country is suffering from debt issues, but in the long run this will be seen as temporary. Australia has followed a similar path with the population increasing sixfold in the past 113 years. If we went through a similar growth phase over the next 113 years, the number of people living in Australia would be about 140 million. No doubt many of those people would be coming out of Asia.
The key is that we are now entering a new economic phase. The period of booming exports is rapidly drawing to a close and we must have policies in place to generate growth and maintain our standard of living. To achieve this we need a different mindset.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
The article explains the “Asian Century” is the idea that Asia — led by a large, dynamic population — would drive global economic growth. For Australian investors it meant opportunity, especially from China’s demand for commodities. But the piece warns that Asia’s advantage has mostly been its population size, many countries lack the political and economic mix to sustain rapid growth, and China’s central planning has led to overspending. Investors should be aware this narrative may change and consider the structural shifts in Australia’s economy.
China’s strong demand for resources pushed up commodity prices, which lifted the Australian dollar, pushed wages higher and kept interest rates above many other Western nations. That benefited mining and resource exporters, but it also caused “crowding out,” making non-mining sectors more expensive and less competitive — a key consideration for investors assessing sector exposure and company costs.
Crowding out, as described in the article, occurs when a booming sector (Australia’s mining boom) soaks up labour, capital and resources that other industries struggle to compete. The mining sector’s rapid expansion made many services and manufacturing activities costly and uncompetitive, reducing growth in those parts of the economy despite overall GDP gains.
The article forecasts that as mining spend falls — notably with coal seam gas projects winding down through 2017 — Australia should see lower interest rates and a weaker local currency (moving toward about US$0.75–US$0.80). That shift would help domestic service industries such as education, tourism, manufacturing and housing become more competitive and drive growth.
According to the article, service-oriented and domestically focused sectors stand to gain: housing, retail, education, manufacturing and tourism. These industries would benefit from a lower Australian dollar, lower interest rates and a more balanced economy concentrated on the east coast.
The article recommends policies that support domestic growth rather than relying on exports: better infrastructure, more competition, reduced regulation and a population policy that attracts more people to live in Australia. These changes are presented as ways to boost sectors like housing, education and tourism and maintain living standards.
The article points to historical examples (notably the US) where sustained population growth supported prolonged economic expansion. It argues that increasing the local population is a proven way to boost demand and growth, and warns that slowing population growth could risk stagnation similar to Japan or parts of Europe.
While the article doesn’t give specific financial advice, it suggests the economic backdrop is shifting from resource-led export growth to domestic services. Everyday investors may want to review exposure to mining and consider increasing allocation to domestically focused sectors that should benefit from a lower AUD and lower rates — such as housing-related companies, education providers, tourism operators and manufacturing — while monitoring currency and interest-rate trends.
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