PASSWORD RESET

Magazine of Socialist Action in Australia

The state of the Australian economy

Australia has a medium-sized economy, equaling 1.6% of world Gross Domestic Product (GDP). This makes it the 14th biggest economy in the world, just behind South Korea and just ahead of Mexico.

International trade contributes about 25% to Australia’s GDP, compared to 17% in 1990. Australia is therefore a trading nation, totally integrated into the world economy. The clothes we wear and the products we use are largely imported. The raw materials our neighbours use are often from Australia. Australia has never been more integrated into the world economy.

The Socialist Party believes there are no viable national solutions to the economic problems facing Australian people. High tariff walls and appeals to ‘Buy Australian’ which are supported by both the far right and sections of the left in the union movement provide no solutions.

Instead, politically serious workers need an international economic understanding and programme. Trade unions need to develop international links to survive and go forward in this era.

Will the mining boom inoculate Australia from a world recession?

There is a mining-led boom in Western Australia and Queensland. However a sense of proportion is necessary. The overall Australian economy grew by 3.6% in the 12 months to March 2008 – good but not earth-shattering.

Terms of trade (the ratio of the prices we receive for our exports compared to the prices we pay for imports) are at their highest level since 1974, largely due to a rise in price for Australia’s exported mining goods.

Mining profits have doubled to about 6% of GDP since 2004. Mining exports would be even higher than they are now if the rail system and harbours had not suffered from so much under-investment in the past.

So can the mining boom keep Australia out of a world recession? The International Monetary Fund (IMF) definitely thinks so. Its latest report on the local economy says the biggest threat to the Australian economy wasn’t a recession but rather the possibility of too strong growth which would generate more inflation.

This optimistic prediction from the IMF didn’t stop it from suggesting that “more public spending restraint could be required, and we encourage the authorities (that is Australia’s Federal and State ALP governments – SP) to identify areas where additional spending cuts could be implemented.”

The resource boom definitely helps the economy, but mining only makes up a relatively small share of the economy. Australia had 3.6% GDP growth last year. Finance and Services contributed 1.2% of this 3.6%, followed by Property and business services at 0.6%, with mining’s contribution at only 0.1%.

If we look more deeply, we see mining only made up 7% of Australia’s $1 trillion GDP, compared to manufacturing at 10% and Property and business services at 12%.

Juggling balls to keep away recession can’t continue indefinitely

A series of rabbits have been pulled out of the hat by local and international governments and Reserve Banks over the past years to stave off a deep recession.

The result has been a debt-fuelled economic expansion. Now, starting with the credit crunch in the US which in turn flowed from the collapse of banks who borrowed to the poorest end of the markets, the tide is beginning to turn.

While the stock market is notoriously unreliable as a guide to the real economy, it has to be noted that the Australian stock market has collapsed by 27% since last year, wiping out $430 billion of investors’ wealth.

If you had $1 million in shares last November, they would be worth only $764,000 now.
This collapse directly hits workers as many of their compulsory superannuation funds have fallen by 5% and more.

Crisis in manufacturing

Even during the upturn, manufacturing went backwards due to the high Australian dollar making exports more expensive and also because of strong competition from China and other low-wage economies.

Between 2004 and 2007 the number of jobs increased dramatically in other areas of the economy but employment in manufacturing dropped from 1,079,000 workers to 1,045,000 – a small taste of what is to come.

This gradual and not so gradual demise of local manufacturing (especially evident in the car and the textile, footwear and clothing industries) is reflected in the trade figures.

Latest figures have the trade balance in goods in deficit to the tune of $8,258 million, due in large part to bosses sourcing their capital goods overseas as local industry can’t compete or doesn’t exist.

A small surplus in the trade of services ($239 million) was not nearly enough to make up for this deficit in goods.

An interesting fact is that the modern Australian economy relies on minerals, fuels and agricultural produce for 44% of its exports. Manufacturing only makes up 21% of exports with services at 22%.

This is a return of sorts to the old commodity-based nature of the economy, something that the ruling class were partially successful in turning away from in the post-war period by actively encouraging the development of local industry behind a wall of tariff protection and cheap power.

Will income from investments overseas prop up the local economy?

Australian investments overseas amount to $882 billion, much less than the $1.6 trillion worth of foreign investment here.

Australia’s net international investment position (the difference between what it owns overseas compared to what foreign capitalists own here) currently has a net foreign liability of $729 billion. So, like many ordinary people, Australian capitalism itself is heavily in debt.

Banks tighten screws on businesses and ordinary people

Australian banks are becoming a lot tougher with small businesses, mortgagees, and customers generally. While banks have minimal exposure to US banks, they get half their funding from wholesale markets which have dried up as global liquidity dries up. This increases the ‘cost’ of money – and this is promptly passed onto small businesses and individuals by way of higher interest rates and a stricter approach to bad debts.

Business confidence is at its lowest level since 2001. The National Australia Bank monthly business survey for June claimed the economy was slowing ‘quite rapidly’.

In the last financial year, 26,000 people declared themselves bankrupt, the second highest figure on record. New housing loans have fallen by 23% since the start of the year. Lending to businesses fell by 15% in June.

House prices are leveling off but not yet falling as in the US, where collapses of 20% have occurred in some cities. If and when this occurs here, there will be big numbers of working families in negative equity (owing more for their home than it is worth if they sold it).

Workers in hock just as inflation explodes

Never before have Australians been in so much debt. The ratio of household debt to disposable income is 160% compared to less than 40% in 1977. The steady rise in interest rates (there have been 12 since 2002) has hit hard. They are now at a 12-year high of 7.25%.

Rising interest rates and a booming mining sector have kept the Australian dollar high and it is close to parity with the US dollar, its highest level for 25 years. This would normally keep down the cost of imports, but Middle East tensions speculation by the oil companies (only 30% of oil is imported!) has seen petrol rise 30% in the past few months, or three times higher than January last year or ten times higher than a decade ago. The CSIRO recently warned petrol could cost $8 per litre in ten years.

While inflation generally is at 4.2% (a 16-year high) it is much higher for basic commodities. For example, Coles and Woolworths control 80% of the grocery market and this is linked to Australia having the highest food inflation in the world, with the food prices rising 43.6% since 1996. The Melbourne Age pointed out that: “a typical basket of food that had cost $100 in March 2007 had gone up to $105.70 in March 2008.”

While the financial pressures on ordinary people are stepped up, wages are not keeping up. The wages share of total factor income has dropped from 62.4% in 1975 to 53.7% in 2007. On the other hand and partially because of this, profits share of total factor income has risen to 27.2%, its highest level since 1960. Real unit labour costs for bosses have also dropped significantly.

The orgy of capitalist aspirational propaganda, propped up by a vast advertising industry, has encouraged ordinary people to borrow against their homes, borrow for homes, for cars, holidays and more. This has increased the number of ‘things’ owned by people compared to previous generations, but owned through debt, long hours of overtime, and a stressed lifestyle.

Not surprisingly polls show a slump in Australians’ confidence about jobs and the cost of living. The percentage of people who think living conditions will get worse has doubled from 18% just after Rudd’s election victory to 43% now.

Market economy will lead to more pain for workers

These economic problems are not acts of God. For example, the rising cost of petrol is due to instability resulting from the occupation of Iraq as well as the speculation of the oil companies. The drought and other unusual weather patterns are at least partially the result of the polluting behaviour of big business.

A major contributing factor to rising food prices is financial speculation and the monopoly control of the food chain.

The Socialist Party argues for the nationalisation of the main parts of the economy, freeing them from the profit driven policies of the capitalists. A democratic, socialist society would prepare an economic plan to use the resources that exist. Instead of relying on the market to dictate the allocation of resources, decisions could then be made in a democratic way through employees’ control of individual enterprises, co-ordinated by an elected socialist government.

Instead of billions spent on defence and advertising, billions would be spent to alleviate poverty and boost public health, education, transport and other basic needs.

In this way, humans would begin to master the planet’s resources for the greater good, instead of being pawns to the capitalist market.

By Stephen Jolly