Australia’s long economic run is flagging

This article first appeared in The Edge Financial Daily, on July 3, 2018.
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THE golden age of Australian economic growth may have passed.

Continuing a run of over 25 years, the expansion most likely clocked another quarter of gains in gross domestic product in the three months to June 30. But that run looks tired, and the weight of many challenges has accumulated.

The most significant are two related shifts. The first is changing relations between Australia’s biggest trading partner, China, and the guarantor of Australian security, the US. The second is the nature of Australia’s relationship with each of them. China’s growth is slowing, and its economy is driven less by investment and exports and more by domestic consumption. That means a waning appetite for the raw materials Australia sells even as China’s economy grows bigger overall. And at some point, China may well have its own recession. Nothing lasts forever.

As for the US, there is a real sense that its relative economic and political clout is fading, certainly in Asia. This fear is not new in Canberra, but it is seen as a longer-term issue, not something that has to be confronted immediately.

The election of Donald Trump and the advent of trade skirmishes with China — not to mention the prospect of an all-out trade war — changes the calculus. The US as the disrupter in Asia, rather than the stabiliser, is a big shift.

From Down Under, the US looks at best indifferent to the world of rules it created. That is terrifying.

Perhaps the real salad days for Australia were from, say, 1978 (when Deng Xiaoping began China’s economic opening) through around 2008 (the global financial crisis). Sure, there were recessions during the first half of that period, but in retrospect they set Australia up for the growth surge that followed. China began its economic rise and the US provided the broad economic and military rules and framework that made the region thrive. There are now questions over both treasure and security, wrestled with last week at the Australian National University’s Crawford Leadership Forum, in which I participated. Neither Trump nor, for that matter, Xi Jinping solely created this existential moment. They did speed and amplify its arrival.

Not everything is about China and the US, though. Scratch the surface and problems familiar to many nations can be seen: an ageing population, anaemic wage growth, swelling cities straining infrastructure, dramatic changes in rainfall, and an erosion of support for immigration. Population growth made a big contribution to economic success.

Australian governments invested a lot the past few decades in forging an economic and political future in Asia. (There was always the alliance with the US to back things up.) What makes the current moment so sobering is that while the bulk of Australia’s exports go to Asia, Australian businesses are neglecting investment opportunities there.

The largest destinations for direct investment in 2015 were the US, the UK, and New Zealand. Singapore was fourth, with a bare 3.9% share, and China was fifth, along with Papua New Guinea and Germany, according to a study from PricewaterhouseCoopers, the Institute for Managers and Leaders, and Asialink Business. That is unacceptable, especially as the post-1945 order fades. Asia and the coming order, whatever that ultimately looks like, are not about to wait for Australia.

The shelter and comfort of powerful-yet-distant friends, first the UK and then the US, have never looked so dated. — Bloomberg