Australia’s economic challenges in three graphs

Compared with other countries, even other developed countries, Australia is a wealthy nation. Our income per person is similar to countries like Canada and Germany, and well above the OECD average.

We have also fared well over the past seven years, compared to many developed nations. The impact of the GFC and the European Debt crisis on the growth trajectory of most countries can be clearly seen in Figure 1. Australia’s growth in GDP per capita was almost uninterrupted, falling only marginally in 2012.

Figure 1: GDP per capita (current prices and PPP)

Data Source: 2015 National Accounts of OECD Countries

Figure 2 expresses consumption expenditure in US dollar terms, giving an illustration of Australia’s international buying power. When compared with Figure 1, it clearly demonstrates the benefit to the Australian consumer of our recent terms of trade boom.

In the ten years to 2012, the world price of Australia’s exports more than tripled. This drove a huge increase in our international buying power and supported consumption spending. The RBA estimated that the mining boom raised Australia’s real household disposable income per capita by 13 per cent.


Figure 2: Consumption per capita (current prices and exchange rates)

Data Source: 2015 National Accounts of OECD Countries

But this result was primarily driven by transitory, external factors, namely rapid growth in Asian economies and the associated increase in demand for our natural resources.

The key issue is wealth, which is important because it allows us to consume. Despite Australia’s strong growth in GDP and consumption per capita, as shown in the above charts, our wealth remains below levels seen in the richest countries, such as the United States and Switzerland.

Since 2012 the terms of trade has fallen considerably. The previous benefit to the Australian economy of the terms of trade boom is now unwinding and Australian consumers are feeling the effects through slow growth in incomes.

This highlights the fact that we cannot rely on external factors to increase Australia’s wealth. The terms of trade boom was a temporary event and it’s a long shot that another boom will emerge to replace it. In order to create long-term, sustainable increases in Australian living standards, we need to increase productivity.

Figure 3 shows Australia’s multifactor productivity performance over the eight years to 2012. The measurement of multifactor productivity can be affected by a number of issues and results can be volatile from year to year.

Nevertheless, it is clear from the chart that Australia’s productivity performance has been less than stellar. In the eight years shown, Australia’s multifactor productivity growth remained around zero, with the highest result 1.1% growth in 2012.

Figure 3: Multifactor productivity

Data Source: OECD (2015) Multifactor productivity indicator

With an ageing population, Australia, needs to improve productivity to maintain or grow our living standards. If we cannot achieve this goal, the risk is that Australia falls back to the pack, that is, we fall back to a steady state with low or no growth in living standards.

Improving Australia’s productivity performance means investing in productive assets, investing in human capital, promoting competition and improving technology. Having the right policy settings is an essential factor.

The Competition Policy Review observed that “[a]lthough reforms introduced following the Hilmer Review led to significant improvements in economic growth and wellbeing…renewed policy effort is required to support growth and wellbeing now and into the future.” Government policy that encourages (and importantly does not restrict) competition and innovation is essential.

Improving Australia’s productivity performance is the key to creating long-term, sustainable improvement in our living standards. This will ensure we continue to enjoy some of the highest living standards in the world.

1. The terms of trade is an index showing the price we get for our exports relative to the price we pay for our imports. In general, when Australia’s commodity prices increase, our terms of trade increases. We get more income from foreigners for our exports so we can afford to buy more imports.

2. Reserve Bank of Australia, The Effect of the Mining Boom on the Australian Economy, RBA Bulletin, December quarter 2014.