Challenges Facing the Australian Economy

Australia is considered to be one of the most developed nations in the world.

Up until now, the Australian economy has not seen any major recessions in the past twenty-five years. Many economic commentators consider this to be a remarkable feat. However, many analysts also believe that this reality may be about to change.

Numerous surveys have explained that a lot of Australians feel that their nation is dealing with serious economic issues.

In this article, we will have a look at some of the major economic challenges facing the Australian economy.

1. Slow Economic Growth

   The rate of growth of the Australian economy has slowed down considerably. The Australian GDP grew by 2.75% in 2017. This cannot be considered to be a bad rate. In fact, this rate is perfectly in line with what the Australian growth rate in the previous years.

   The problem is that the Australian population is increasing rapidly. In the previous year, the population rose by 1.6%. Hence, even though the GDP growth is acceptable, the per capita GDP growth shows a rapid decline.

   The Australian GDP growth is fuelled by immigrants. More than 50% of the population growth can be accounted for by immigrants. This is the reason why Australian citizens have become wary of increasing immigration. Immigrants, who were once the backbone of the Australian economy, are threatening to bring it down today.

2. Reliance on Natural Resources

   Another major problem with Australia is that the economy is largely dependent upon natural resources. The mining for coal and minerals is the main occupation in Australia.

   The growth in the Australian economy is largely driven by export of these natural resources. This is obviously a problem! If an economy is overly reliant on natural resources, then it is also hugely impacted by the fluctuations in the prices of these natural resources. Also, natural resources tend to be finite. This is a limit to the number of years which an economy can rely on them. This fact has been pointed out by notable economist Joseph Stiglitz.

   Mr. Stiglitz is of the opinion that Australia needs to focus its attention on developing its people and moving towards a service based economy. Having a commodity-based economy can be dangerous in the long run if a global recession strikes.

3. Job Growth Rate

   The Australian government has been patting itself of the back for achieving high job growth during 2018. The economy added over 330,000 jobs during this period! This would be commendable for any other economy. However, not for Australia!

   In Australia, even though the number of jobs created has gone up, the unemployment number has gone up even higher! This is because of the rapid increase in the number of people looking for work.

   Hence, even though 330,000 jobs were added, another 350,000 workers were also added during the same period. Since the number of workers is more than the number of jobs, the unemployment situation has only worsened during the period. An increase in the worker population led by migration has created a situation where unemployment rates are unlikely to come down in the future.

   It also needs to be understood that since there are so many workers available in the market, the Australian businesses are spoilt for choice. Hence, they don’t have to increase wages at all. This is the primary reason why the Australian middle class has been stuck with a stagnant wage and hence have ended up going deeper into debt in order to maintain their standard of living.

4. Household Debt

   The household debt situation in Australia is particularly alarming. The household debt to income ratio is over 200%! Also, the household debt to local economy ratio is at 125%. This can be compared with 80% to 100% ratio for countries like Canada, the United States, and Great Britain, etc. This high household debt can cause grave damage to the Australian economy given the fact that most of it is owed by the middle class.

   Nearly two-thirds of the debt is owed by the top 40% of the Australian economy. This means that it is all the lawyers, bankers, doctors and other professional middle-class people that are in debt. These people form the backbone of any economy. If they face economic duress in the near future, they will simply cut down their discretionary spending, and then the entire economy will suffer.

   This is the reason why the IMF is also worried about Australia. In their latest report, they have mentioned that Australia could be on the brink of a crisis. This is because of their high reliance on household debt to propel the economy. Also, since the Federal Reserve is going to raise interest rates sharply, it is likely that a lot of assets will face a sharp adjustment in valuation. Therefore a lot of loans which appear to be viable now may not remain so in the future. The adjustment in valuation has already happened to some extent. The housing prices in Australia are facing a downward trajectory since mid-2017. This downward trend is likely to exacerbate in the future.

The bottom line is that the future of the Australian economy seems shaky. In the past, this economy has gone over 25 years without a recession. However, it seems like the fundamentals are deteriorating and the economy could witness a fall anytime soon.