Why Australia’s Miracle Economy Is Failing

By Bloomberg Originals

FinanceBusinessEconomics
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Key Concepts:

  • Economic growth vs. per capita GDP
  • Mining boom and resource dependence
  • Population growth and immigration
  • Housing crisis and affordability
  • Inflation and wage stagnation
  • Household debt
  • Productivity and its drivers
  • Economic reform and diversification

1. Australia's Economic Paradox:

  • Australia has avoided recession since the early 1990s (excluding the pandemic period), largely due to its vast natural resources.
  • However, while the overall economy has grown, GDP per capita has declined, indicating a recession for the average person.
  • Example: Kim Dao, a coffee shop owner, illustrates the struggle to find affordable housing and manage rising ingredient costs.

2. Drivers of Australia's Economic Growth:

  • Mining Boom: Fueled by China's economic growth, Australia is a major exporter of coal, iron ore, natural gas, and gold. Mining contributed $280 billion in export revenue between June 2023 and June 2024.
  • Population Growth: High levels of international migration (35% growth in the past 20 years) have underpinned economic growth.

3. The Housing Crisis:

  • Demand for housing outstrips supply, leading to soaring home prices. Sydney has the second most expensive homes globally, after Hong Kong, relative to income.
  • Rental affordability is at its lowest since at least 2008, consuming a significant portion of income.
  • The housing shortage is exacerbated by constrained land use and insufficient affordable/social housing.

4. Inflation and Wage Stagnation:

  • The "barbecue index" (Bloomberg) shows significant price increases for common food items since 2020.
  • Real wages have been negative for over two years, meaning wages haven't kept pace with inflation.
  • Household disposable income has fallen below the OECD average since the pandemic.

5. Household Debt:

  • Australia's household debt is over 200% of household income, one of the highest globally.

6. Productivity Challenges:

  • GDP per hour worked has been flat for the last decade, indicating a "lost decade of productivity growth."
  • Australia's productivity growth has fallen behind the US since the pandemic.
  • The economy is increasingly reliant on the service sector (e.g., care services), which is less productive than mining or manufacturing.
  • Start-up funding per capita is lower than in other countries, hindering innovation.

7. The Need for Economic Reform:

  • Australia hasn't had major economic reform since the 1990s.
  • Politicians emphasize the need for cost-of-living relief and making the economy more resilient to external shocks.
  • The government has introduced a plan to boost green manufacturing and high-tech, but analysts say funding is limited.
  • Diversifying the economy and fostering innovation in manufacturing and mining are crucial.

8. Government Initiatives:

  • The government has introduced a plan to boost green manufacturing and high-tech.

9. Key Arguments:

  • Australia's economic success has been heavily reliant on mining and population growth, but these factors are no longer sufficient to guarantee prosperity.
  • The housing crisis, wage stagnation, and declining productivity pose significant challenges to the country's economic future.
  • Economic reform, diversification, and investment in innovation are necessary to improve productivity and maintain Australia's economic standing.

10. Conclusion:

Australia's "lucky country" status is under threat due to a combination of factors, including a housing crisis, wage stagnation, declining productivity, and over-reliance on mining. Addressing these challenges through economic reform, diversification, and strategic investment is crucial to ensure the country's continued prosperity.

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