Why Australia can stay recession-free for longer

Sydney NYE 2016. The 12am New Year's Eve fireworks on Sydney Harbour, viewed from Mrs Macquarie's Chair. 1 January 2017. Photo: Wolter Peeters
Sydney NYE 2016. The 12am New Year's Eve fireworks on Sydney Harbour, viewed from Mrs Macquarie's Chair. 1 January 2017. Photo: Wolter Peeters
New lights installed for trials in the road and footpath that alert pedestrians on their mobile phones that the don't walk lights are illuminated.
Photo taken on the corner of Pitt and Goulburn Streets, Sydney.
29th March 2017.
Photo: Steven Siewert

New lights installed for trials in the road and footpath that alert pedestrians on their mobile phones that the don't walk lights are illuminated. Photo taken on the corner of Pitt and Goulburn Streets, Sydney. 29th March 2017. Photo: Steven Siewert

Australia is likely to lag the current global economic uplift, but strong population growth and a fundamentally resilient economy should see the country outperform other developed economies over the longer term, BIS Oxford Economics head of Australian economics Sarah Hunter says.

The relative underperformance of the local economy has been highlighted in recent days by the crossing of US two-year bond yields above their Australian counterparts -something that hasn't happened in 20 years and which sparked worries that Australia risks being left behind in the changing global economic landscape.

"Relative to trend growth, the outlook here for the next couple of years is definitely less rosy than in the US, Europe and Japan - and generally the world," Ms Hunter said.

While recognising these current trends, she said it was not a harbinger of longer-term woes for the local economy.

"I do still think the fundamentals here are better than pretty much any other developed country," she said.

"Largely that is a population story, because the demographics here are just so good," she said, pointing to the combination of strong inward skilled migration and the relatively high birth rate.

"Because of that the supply side is getting bigger and at a much faster pace than the US and certainly Japan. And so from an absolute GDP growth rate I think Australia will outperform when we look over the next 10 years.

"But when we look over the next two years it's probably going to be about the same as the US." Which, in historical trend terms, is a disappointing outcome.

Ms Hunter lauded Australia's 26-year recession-free run as "impressive". But rather than a never-to-be repeated anomaly, she believes it is a reflection of fundamental factors within the local economy.

"The structure of the economy here almost lends itself to that as an outcome," she said. "It's a currency swing momentum story."

As an important sector such as mining is doing well, Ms Hunter said, this tends to have a dampening effect on other corners of the economy, such as tourism and manufacturing.

"Look over the last decade and clearly after the financial crisis the miners do really well as China turns on the taps. The Aussie dollar hits parity and goes beyond. That's great news and income is flooding in; people are chipping out to WA to work there," Ms Hunter said.

"But if you go and ask the hoteliers, it's just awful for them. [The high currency] absolutely crucifies them."

While the end of the mining investment boom spelled trouble for cities such as Perth and activity in the resources sector, the economy's flexibility has allowed for a relatively smooth transition, assisted by a weaker dollar and a well-timed housing construction boom.

At its most acute, the slowdown in mining investment over three years slashed around 1 percentage point off annual GDP growth, Ms Hunter said. "And yet the economy still grew - that's amazing."

While recognising that a recession is always possible, she emphasised that "the economy does very well at moving resources to where they are most needed and moving them comparatively quickly, and that's the fundamental reason why there hasn't been a recession here [in so long].

"I think it's a real positive for the economy that it can manage those transitions without getting into more trouble. Yes, during the transition growth has to slow because people can't just transport themselves from the east coast to Perth and vice versa, and capital doesn't do the same, but it is incredible that that transition happens so smoothly."

While Ms Hunter is upbeat on the local economy over the longer term, she sees an "orthodox" governor Philip Lowe not moving ahead of signs of a pick-up in wages and inflation.

"I think from that perspective they are not introducing any uncertainty and that is one of their big roles: to give the economy and markets a platform to work from, and they have done a good job of that. It's orthodox and traditional, but it's been very successful so far."

Ms Hunter said while the "next move is definitely up", she doesn't see the RBA "moving until 2019 at the absolute earliest, and probably not until the back end of 2019".

This story Why Australia can stay recession-free for longer first appeared on The Sydney Morning Herald.