Global discombobulation seems to be the order of the day as we face 2017. Bizarre politics; terrorism; mistruths about free trade and globalisation to scare the nervous; digital disruption changing nearly everything just as electricity did more than a century earlier; and polarised incomes and wealth – are all making a lot of the world’s 7.4 billion population fearful. It has been a strange 2016 with no guarantee that 2017 will be any more sane.
As we open a new calendar year, the world economy is slowing a little to an expected 2.6 per cent growth in gross domestic product (GDP). It is polarised in terms of growing versus stalled economies, and sharing a widespread shortage of statesmen or stateswomen. Vision, hope, courage and leadership are in short supply. Where it does exist, leaders often face internal criticism as we see in Germany. Others, like New Zealand and Canada have bold and popular leaders.
A world in turmoil
In the US, the choice for president was between the unpalatable and the unacceptable. Non-compulsory voting meant that of some 250 million eligible voters less than 60 per cent did vote. Those that did, voted for change from the politics of recent times; and for a self-proclaimed demigod in the form of Donald Trump whose many promises are impossible to implement. The old saying: be careful what you wish for, may prove prophetic. The US, if not the world, is entering uncharted waters.
Sabre rattling, a well-known distraction technique when an economy is not going well, surfaced in North Asia and Eastern Europe in 2016. The UK filed for divorce from the moribund EU federation of Central and Western European economies, and divorces are usually painful. The Philippines elected as president a strongman with 19th century solutions to crime: in this case, drugs.
Much of South America reflected its traditional heady cocktail of politics, class warfare and volatile economics. Economic collapse in Venezuela, negative growth in Brazil and Argentina’s GDPs, and slow growth elsewhere meant it was not a happy year for the region.
Africa is a mixed bag, as usual, with honest and competent governments and strong economic growth present in only a minority of its 49 nations.
The Middle East continues to be a regrettable mess of Western interference (well-meant or self-seeking), tribalism, internecine religious hatred, civil war and human tragedy in huge numbers: millions. Low oil prices are exacerbating the situation, meaning nations, including even Saudi Arabia, are unable to balance their budgets.
Our own Asia Pacific region, is the best placed of the world’s eight geographic regions; more so if we include the Indian subcontinent nations to make up the bigger Asian mega-region which is growing at more than double the world’s growth of around 2.7 per cent. Three quarters of our trade, immigration and tourism takes place in this mega-region, so we are well integrated. It is the world’s largest economic region at 42 per cent of world GDP, and is the fastest growing at almost 6 per cent in GDP in 2016 and continuing into 2017 at over 5.5 per cent. It is also the most populous region, accounting for 57 per cent of the world’s population.
Yes, prices of Australian minerals, going mostly to Asia, have taken a steep dive in recent years, and are now recovering a little, but volumes have continued to grow and are likely to do so into the late 2020s. If we could only get our act together and attract more than the tiny 1 per cent of Chinese tourists travelling overseas that we do now, our tourism receipts could challenge our total mineral earnings within a decade or so. After all, services are the world’s fastest growing traded products.
What about Australia?
All of which leads to Australia’s prospects in 2017. Given that we are in a market-led economy in the post-industrial age of the past half century, rather than the preceding period of supplier-hegemony, it is important to start with the marketplace. The main aggregates are shown in the exhibit.
Consumption expenditure dominates, accounting for more than 60 per cent of the total market. Consumption expenditure has not declined in any year during the past six decades and, therefore, has never caused a recession. It won’t decline in 2017 either, with expected growth of just under 3 per cent. Exports, accounting for a sixth of the market, very rarely turn negative. These have been growing at more than 6 per cent per year for several years, have never caused a recession in living memory, and should stay at over 4 per cent in 2017.
This leaves capital expenditure – easily the most volatile segment, and the only one that causes recessions – making up more than a fifth of the market. But to cause a recession, total capital expenditure (capex) has to fall more than 8 per cent in a single year. It was down around 4.5 per cent in 2016, and is unlikely to sink to minus 8 per cent in the 2017 financial year, but could do so in either the 2017 calendar year or the 2018 financial year. However, it doesn’t have to if the fall in mining capex and probable easing of housing capex (during 2017) are offset by investment in infrastructure by governments and a lift in private investment in equipment and IP.
Any recession is more likely in the 2018 financial year than in 2017. In some ways, we need a recession as a wake-up call for the failure of successive governments to address much-needed reform of the labour market, fast broadband connectivity and speed, fiscal and taxation policy, energy policy, and parliament. The country needs pragmatic vision and goals rather than platitudes and rhetoric. We haven’t had such a wake-up call since 1982–83 and 1992, well over a generation ago.
Fortunately, the nation has a war-chest of past achievements and continuing luck to underpin such temporal disruption and pain if these issues are tackled. It includes our standard of living, our most-liveable cities, consumer and business confidence, relatively tension-free and harmonious society, low national debt, near-full employment and the fact that we are creating well over six times more new jobs than we are losing every five years. We just need visionary, pragmatic and courageous leadership at federal and state levels.
We have some shortfalls, but hopefully we will get there, without the need for a recession.