Australia's two-speed economy

by Jonathan Milne / 17 September, 2011
Even through the global financial crisis, the mining boom ensured Australia prospered. But the bounty is spread unevenly, with many Aussies deeply unhappy.

The warmth, the scenery and the beaches were as enticing as Danny McKeown had expected when he arrived in the Queensland coastal resort of Hervey Bay in late March. What he had not banked on was the unemployment.

“Hervey Bay is a beautiful, idyllic, swim-with-the-dolphins type of place,” he says now, back home in Wellington after more than four months’ fruitless search for a job in Queensland. “But every town on the coast from Brisbane to Cairns is struggling because they depend on tourism and, in the current economic climate, Australians are not travelling domestically, and nor is there much international tourism because Australia has become so expensive.”

Aged 50, intelligent and outgoing, but with no formal qualifications, McKeown realised after a couple of months in Hervey Bay that to work, he would have to buy a job. “It seemed like every other business was for sale. Every little coffee shop you went into was for sale. The florist was for sale, the hairdressers was for sale. I stayed at two motel/hotel complexes and both managers asked if I would like to buy the management rights so they could get out and go somewhere else, because in a motel it’s seven days a week, 24 hours a day and to make money you have to try to not pay wages, so [you] do all the work yourself.”

It was a common story. The impression McKeown got was the booming Australian economy was all to do with mining. Then there was the other Australia, of Aussie-battler mums and dads, both working but unable to pay their bills.
McKeown, it seems, experienced first-hand what economists are now describing as the two-speed Australian economy. Running at top speed is the economy built around the resources boom, which has made staggering wealth for mining companies, which pay high wages and which have pushed the Australian currency to record highs. But the value of the currency, in particular, is inflicting huge damage on other parts of the economy, making it difficult for local manufacturers to compete with imports, and very difficult for exporters and tourism. Other than airfares it is, for example, cheaper for New Zealanders to visit the United States than to go to Australia.

For Australians, the good news part of the economy is very good indeed. Australia was the only developed economy not to shrink in 2009 as the effects of the global financial crisis halted growth in every comparable country. With its enormous mining industry literally providing the fuel for the furnaces of China and India, and with prices for iron ore and other mineral resources at a peak, Australia, the world’s 15th-largest economy, has been the envy of the developed world.
Its dollar reached US$1.108 in late July – its highest level since being floated in 1983 – and economists expect it to stay above parity with the US dollar for some time. Earlier this month Macquarie forecast the currency would reach almost US$1.20, both because of the strength of Australia’s economy and the weakness of the US. Further, growth in the Australian economy is far from over. Its Treasury is forecasting a staggering 77% expansion in output from the resources sector by 2020 and a flurry of activity is occurring as the A$430 billion of resource projects in the pipeline are being brought online as quickly as possible to make the most of the boom.

If you’re in mining, you’re in the money as the world’s biggest mining company, Melbourne-based BHP Billiton, showed last month when revealing the biggest corporate profit in Australian history – more than US$23 billion. Even without a resources tax, the mining boom has helped the Australian Government keep debt enviably low. At a time when countries like Greece, Italy, Portugal, Spain and Japan are famously staggering under debt-to-GDP ratios of more than 100%, Australia’s was at 11% last year. This is not solely attributable to the mining boom. Successive Australian Governments, whether Liberal or Labor-led, have run surpluses and the present Government, running a deficit, aims to return to surplus as soon as possible.

But that may be easier said than done because beyond Mt Isa, Western Australia and other mining areas, quite a different economic story is unfolding.

Last month BlueScope Steel, based in the New South Wales industrial heartland of Illawarra, announced it would make more than 1000 workers redundant because it could no longer cope with the high cost of raw materials and the strong dollar. In the same week, but in a totally different industry, Qantas said it was shedding 1000 jobs. Small-scale redundancies go largely unreported and, although unemployment is at an enviably low 5.1%, it rose in July for the first time since October last year. Building approvals were 15% lower in the year to July, with house prices down and short-term visitor arrivals down 2.5% in July.

A lowering of the official cash rate, which has stood at 4.75% for nearly a year, is widely expected soon as a form of stimulus. Overall, the economy contracted 1.2% in the first quarter of this year, although latest figures show it then grew by the same amount in the second quarter. As well, in a story that is familiar around the world, retailing has slumped as families struggling with high housing debt and worried about job security rein in their spending.

“These are tough days for a number of working people who are contemplating their futures,” Prime Minister Julia Gillard acknowledged when she went to meet BlueScope workers. Treasurer Wayne Swan agrees. “What Australia needs now more than ever is a calm, responsible debate about the changes occurring in our economy and the policy settings that best position our country to benefit,” he said in one of his recent economic notes.

But farmers, manufacturers, those educating overseas students, and tourism operators don’t want a debate – they simply want the dollar to fall. The downside of the mining boom is two-fold – there is little trickle-down of the wealth to the rest of the economy, and it has forced up the dollar, putting those industries that depend on exports, or on tourists, under great stress.

Paul Rafferty, a senior research fellow at the University of Sydney’s Workplace Research Centre, told the Listener the unevenness of the Australian economy is very real.

“There’s talk of a two-speed economy, or a patchwork economy, which is all about saying that different regions, different occupations and different industries have experienced the last three years in very different ways. Recently, you’ll have noticed several large manufacturing companies have announced big layoffs, complaining that the Australian dollar is crippling their ability to export, or their competitiveness against imports. This sort of experience was happening before; it’s just been made more stark by the global financial crisis.” The pain, he says, is widely spread outside the mining sector.

Australian Manufacturing Workers’ Union national secretary Dave Oliver agrees too few people are enjoying the benefits of the mining boom. “Manufacturing still employs close to one million Australians. Mining employs around 200,000,” he said at the time of the BlueScope announcement. Yet manufacturing, according to Treasury figures, is expected to increase its output by only 5% up to 2020.

“The most important lesson today for Australia is this: our economy cannot just rely on mining,” says Oliver. “We can only dig up our mining resources once.”

Rafferty says many people are being adversely affected. “We’ve seen a flood of people coming into the country – net migration is running close to 200,000 people a year. But many of the people coming over are finding it difficult because if you’re not in the right occupation, or the right place, or with the right work experience, your experience could be very similar to that of other people in Australia who are not hooked into the mining industry and have found that costs have been going up while incomes have been stable or declining. In other words, there are massive cost pressures on people who are not part of the big mining boom.

“If you’re in that construction or production area, you can still do very, very well for perhaps the next four or five years, all other things being equal. But a lot of the equipment, the stuff that goes into those construction projects, doesn’t necessarily have a lot of flow-on effects to other parts of the economy. So there are some industries that have benefited from those developments but a lot that haven’t, and there are some for whom it’s been cruel because of the exchange rate or losing their key staff. It’s very uneven.

“We know the trickle-down theory was always a nonsense hypothesis, and this is equally so, and the failure of the Australian Government to deal with some sort of resource-led tax is going to exacerbate that. There’s a lot of frustration around because there don’t seem to be good mechanisms for redistributing the wealth.”

Rafferty says that, in particular, tourism, education and other service exports have “really been knocked around” by the high dollar. “Australia built a whole export market on university degrees on the basis of US60c to the A$1. Now that it’s US$1.08-$1.10 to the A$1, the whole economics have changed.”

In the World Economic Forum’s new Global Competitiveness Report 2011-12, Australia drops a startling four places in the rankings to No 20 – still ahead of New Zealand, but now trailing Qatar, Belgium, Saudi Arabia and Austria. The country’s transport infrastructure and ports, the report says, are increasingly straining.

Beef, beans and beaches – these are some of the trade openings kindly provided to New Zealand by the soaring Australian dollar. Beef+Lamb New Zealand economic service executive director Rob Davison says the average price for a tonne of frozen beef shipped to North America was US$4300 over the past year – but with the Australian dollar rising faster than ours, its beef ­farmers take home a smaller cut.

Similarly, New Zealand’s manufacturing sector has done better than Australia’s – especially sectors like processed food. Baked beans company Heinz has announced it will shift much of its Australian tomato processing to Hawke’s Bay early next year, shutting down its Girgarre factory in northern Victoria and cutting jobs at its Wagga Wagga plant. As Finance Minister Bill English has noted, New Zealand’s lower wages make us more globally competitive.

And in tourism, New Zealand is enjoying an influx of Rugby World Cup tourists while Australia’s beachside cafes sit half-empty.

McKeown, who tried to get a job as a trolley attendant at a local Coles supermarket and was rebuffed, says although he was in Hervey Bay in its off-season – where tourism picks up with whale-watching in late September – tourism operators had told him the past two years had been difficult and they were not expecting any change this coming season. The community noticeboard in the local supermarket indicated lots of people were desperate to earn some money, he says.

“I met a lovely couple in their forties with two teenage children, and I went to their house one day and there was a for-sale sign outside. In my naivety I said, ‘Oh, you’ve decided to move?’ And they said, ‘No, Danny, we haven’t paid the mortgage for three months and the bank has kindly given us a period of time to sell up and move to something smaller and cheaper.’

“I called again a week later and the same couple were washing their car and I said, ‘Ah, giving the car a clean-up.’ And they said, ‘No, we can’t afford the petrol and the local car yard said if we cleaned it up and brought it in they would exchange it for a more economical car.’

“And that wasn’t untypical. I found in a smallish town like Hervey Bay, everybody was struggling. Lots of restaurants were closed and even in the four months I was there, more closed.”

When chef Danny Reily returned from 17 years working in restaurants across Europe, he thought he was coming home to the Lucky Country. “I’ve been back in Australia since 2004 and I’ve just seen it go down since then,” he says. “You can buy some of our products cheaper overseas than you can here.”

Eighteen months years ago, Reily bought the 56-seat Smoked Pepper cafe near the Hervey Bay water park. Six months later, he put the business up for sale for A$130,000, furniture and fixtures included – and there it remains. “Tourism has died,” he says. “A few backpackers have closed, and those who come through stay in campervans and don’t eat in cafes. The economy’s shocking, like everywhere else.”

Restaurateurs were hard-hit by the floods and cyclone that punished Queensland late last year and early this year, destroying the famous Fruit Bowl. Reily has been paying 25% more for ingredients. Capsicums peaked at A$10.99/kg a few weeks ago, though the price has dropped since then.

“There are a few people from here that work in the mines, but we don’t see too much of the money flow down here.”

Although the mining towns boom, Rafferty does not see an improvement coming any time soon for the rest of the economy, which is giving rise to tensions around the distribution of the boom’s benefits.

“We’re starting to see some of the things we’ve been seeing in Europe – the growth of populist nationalism – and I think you can expect that will continue because now some of the big employers in tourism, manufacturing and in the education services sector are having to make decisions based on the dollar possibly staying high for a long time. We’ll have to adjust to that and some of that adjustment will be putting people off [work]. It has started and we’re going to see more of it.”

And to Kiwis still looking to Australia to provide opportunities and financial security, Rafferty issues a warning.

“If you have the right set of skills and are in the right place, in the next four or five years it could be fantastic. But if you just think you’re going to come over to Australia as a bank clerk or with hospitality experience or whatever, it’s a difficult situation. The cost of living in Australia is quite significant in all the major cities. It could be touch and go whether or not you might be better off staying in New Zealand.”
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