10 things to be optimistic about in 2020

Sunday, 01 March 2020


    Though fears of faltering GDP growth and global political instability dominate headlines, there are still many things to be optimistic about. Here are 10 reasons to keep a positive outlook for the year ahead.

    Humans are mostly wired for bad news. Israeli history professor Yuval Noah Harari, in his 2014 book Sapiens: A Brief History of Humankind, explains it as an evolutionary necessity: we pay more attention to fears and anxieties because that kept our ancestors alive on the predator-filled plains of east Africa. But this tendency to focus on negatives also makes good news harder to notice.

    So with 2020 well underway, here are some reminders of the opportunities facing Australian business that provide reasons for a positive outlook for the year ahead.

    The centre of global economic power is shifting towards Australia

    Economic geographers talk about the global economy’s “centre of gravity”, which is the average location of economic activity on the planet’s surface. In the late 20th century, that point used to be in the North Atlantic, between the US and Europe, more than 15,000km from Australia. However, China’s elevation into an economic superpower has pulled the location east across the Mediterranean and into Iran. During the next 20 years, China will pull the centre of gravity into the Himalayas, near the world’s other new economic power, India, just under 10,000km from Australia.

    Treasury has identified Australia’s distance from markets as a key reason for the gap in productivity performance between Australia and the US. In 2005, two Treasury economists calculated that if Australia was located where the UK is, its 2005 GDP would have been about one-third higher. So as Australia’s distance from the big markets shrinks, local businesses have reason to be optimistic that economic geography is moving in their favour.

    The old and wealthy are growing fast

    It’s a truism that ageing baby boomers are swelling the ranks of the old. The Australian Bureau of Statistics (ABS) reports that more than 3.4 million of Australia’s 25 million people — 14 per cent — are now aged 65 or older. But it’s not just that the old are more numerous than they used to be, but rather that the economic system of 40 years ago favoured the young. Four decades of changes have tilted it in the other direction.

    The old own more assets than they used to. The national housing boom and compulsory superannuation mean increasing numbers of people are retiring with valuable assets. Meanwhile, the rise of asset-based lending means more of these people can turn some of their housing value into spendable funds.

    The Australian Institute of Health and Welfare reports 13 per cent of over-65s remain in the workforce, a choice made easier by the rise in service sector jobs. Additionally, improved health care means that, compared to 40 years ago, a 65-year-old is less likely to be restricted by their age. The average 65-year-old woman can expect another 22 years of life, with almost a year less disability than two decades ago.

    Australia has cut heart disease and vision problems in particular, while dementia rates are also falling. While the awful period of sharply declining health right at the end of life, known as “end-of-life morbidity”, eats up a lot of money, better fitness and medical care are delaying its onset, and research suggests its length is actually decreasing.

    The result is that the old present one of the fastest-growing business opportunities in many Western countries. Research suggests this market is underexplored and underexploited.

    Australian household wealth graph

    You can raise your business productivity

    Chances are your business has opportunities to do more with less — if only you can find them. Although that is no trivial task, it is possible for many firms. When economists look at productivity differences between firms in the same industries, they see big and often widening gaps between the best performers and the average. Some superstar firms dramatically outperform the rest.

    One interpretation of these figures is that digital technologies are enabling certain firms to monopolise the global economy, according to Harvard Business Review Online’s “Superstar Firms are Running Away with the Global Economy”. But a second interpretation is that the nature of today’s intangibles-oriented economy allows well-managed firms to shine. Their prosperity may be driven by higher spending on intangible capital — such as research and development — than by increasing returns to scale. “Nearly half of superstar firms are displaced from the superstar top decile in every business cycle,” one group of researchers reported.

    One opportunity is for lower-productivity firms to catch up to the stars, perhaps by benchmarking themselves against them. “There is enormous potential for economic growth if the firms now lagging in productivity can be brought up to speed,” writes Timothy Taylor, editor of the Journal of Economic Perspectives, a leading American economics publication.

    But as Taylor notes, growth can also happen in other ways: high-productivity firms can take over lower-productivity competitors, or drive them out of business.

    This is more reason to work on productivity.

    Australia has a low corporate tax rate for domestic investors

    There’s an argument for lowering Australia’s headline rate of corporate tax from 30 per cent (for large businesses) or 27.5 per cent (for small ones) in order to look more attractive to foreign investors. The OECD average is about 24 per cent.

    But Australian rates are usually not as high as the 30 per cent headline rate might suggest. A 2017 report from the US Congressional Budget Office calculated Australia’s average corporate tax rate — tax as a share of corporate income, taking into account various concessions — was just 17 per cent in 2012 for a US-owned company.

    No other OECD country has Australia’s system of imputation, meaning that unlike residents of many other countries, Australians pay tax on corporate profits only once. When you adjust Australia’s tax rate for this difference, it becomes even more competitive for anyone paying Australian income tax.

    India and Indonesia will boom

    We’ve already seen that the economic centre of the world is moving east into Asia. Most people understand that China’s rapid rise has fuelled that change, but it is easy to forget two other Asian economies that are projected to enter the world’s top-four economies during the next two decades: India and Indonesia.

    China, the US and India will be the big three in 2050, with all likely to have pushed their annual GDPs above US$40 trillion. The UN estimates India will become the world’s most populous country by 2027. The World Economic Forum predicts it will overtake the US as the world’s second-largest economy within the next decade, as well.

    Furthermore, Indonesia’s GDP is projected to grow to above US$10 trillion, ahead of Turkey, Brazil, Egypt, Russia and Japan. Its population now tops 270 million and economic growth is running at five per cent. The World Bank estimates one in every five Indonesians — around 50 million people — is now middle-class, a figure expected to grow rapidly during the next two decades as income and population growth make the country a major economic power. As the market surges forward, Indonesia’s low-priority status with most Australian exporters is likely to change.

    top 10 countries GDP graph

    Agriculture productivity can take inspiration from the Dutch

    During the 40 years to 2017–18, Australian agricultural productivity grew at unspectacular rates — an average one per cent per year for broadacre and beef farming, 1.5 per cent for cropping, and 1.6 per cent for dairy.

    The performance of nations such as the Netherlands suggests much better results are possible, while using less of the world’s land and natural resources. With just 33,700sq km of land, the Netherlands is the world’s second-largest exporter of food, behind the US. In 2018, it shipped agricultural products worth €90.3b. Some of the biggest rises in demand for Dutch produce came from distant markets such as China and Japan.

    This tiny European nation cultivates intensely — greenhouse clusters the size of cities are easily visible from space. Yet during the past two decades, parts of the Netherlands have reportedly reduced agricultural water use by 90 per cent, slashed use of chemical pesticides in greenhouses, and reduced antibiotic use in poultry production. During the past three decades, the Dutch tomato industry has become the world leader in yield, producing more tomatoes per square kilometre than anywhere else.

    We are happier than you think…

    While Australians often decry their politicians, we admit our own lives are pretty good. In a 2019 Ipsos Global Happiness Study, 86 per cent of Australians surveyed said they were “very” or “rather” happy.

    This is the equal highest percentage with Canada and well above the global average of 64 per cent. Yet on average Australians guessed that only 53 per cent of their fellow citizens felt this way. Like much of the world, Australians have been underestimating the happiness of those around them. It’s worth remembering next time you feel the country is beset by troubles.

    In 2018, KPMG reported “the Netherlands produces 810 times more export earnings per hectare and nearly three times more agri-food export earnings than Australia”. KPMG said what sets the country apart from the rest of the world is “the sheer investment into leading-edge technology development” combined with a relentless focus on collaboration between industry and researchers. Drones, for instance, patrol many Dutch potato fields, evaluating plant health.

    Interest rates are lower than ever

    We live in an era of remarkably low interest rates — not just low short-term rates dictated by central banks, but low long-term rates, which are heavily influenced by private investors. Australian government 10-year bonds trade at just one per cent, having fallen from closer to three per cent in mid-2018, and spreads between government and corporate yields are close to 10-year lows.

    Now is a particularly good time to finance projects with big future payoffs, advises Melbourne Business School dean Professor Ian Harper FAICD. “This is just the time when those sorts of projects ought to be pulled out of the bottom drawer and funded.”

    Lithium-ion batteries are cheaper

    The price of lithium-ion batteries has dropped by more than 85 per cent in the past decade. Battery prices that were above US$1100 per kilowatt-hour in 2010 are now just US$156 and should fall below US$100 in 2024, according to research firm BloombergNEF. By 2030, they could hit US$61 per kilowatt-hour.

    Falling manufacturing prices, improved cell pack design and other developments won’t just enhance the capabilities and prices of iPhones and Teslas. During the coming years, battery power will pop up in new places such as delivery vehicles, and push into the electricity grid in more significant quantities. Car manufacturers and electricity distributors are working on ways to use the battery capacity of electric cars to supplement the power grid when the vehicles are not in use for transport.

    Battery capacity within power grids will become increasingly important as the price of solar and wind power keeps falling. By 2050, these sources are predicted to comprise 48 per cent of the global power generation mix.

    Accelerating demand for lithium-ion batteries provides considerable opportunity for Australia. As the world’s largest producer of lithium, with mineral reserves covering 90 per cent of the elements required in lithium-ion battery chemistry, Australia has a distinct competitive advantage.

    Violent crime is low

    Violent crime in Australia, as in many Western countries, has significantly fallen from the highs of 40 years ago. Homicide rates are generally the most reliable indicator of societal violence. ABS figures show that while Australian homicide victimisation rates are slightly up from the low levels of the mid-2000s, they are a third below 1980 levels.

    Australian governments: good by world standards

    Many may disagree, but Australian governments remain competent. The country’s leading politicians are economic and social centrists. Australia ranks sixth in the world on the UN Human Development Index, ahead of countries such as Sweden, Canada and NZ. Granted, Australia has had many prime ministers during the past decade, but whereas in some countries this would be the trigger for wild instability, Australia has simply moved on.

    Rise of renewables

    VW bus with renewable energy

    An increased use of renewable energy and improved technology has dramatically lowered Australia’s levelised cost of renewable energy relative to fossil fuels. A recent Partners in Performance report said the energy landscape in Australia has reached a tipping point where the levelised cost of energy (LCOE) — the measure of the comparative lifetime costs of different energy sources — from renewables is now lower than the marginal cost of generating with fossil fuels. As the uptake of renewables increases, economies of scale will further make them cheaper.

    When combined with expectations of global investors, the community and legislative pressure to reduce greenhouse gas emissions, this creates a new paradigm. It is good news for the transition to a low-carbon future, but there are risks such as disruption to the energy network, increasing price volatility and instability in the grid. However, from an environmental perspective, the rise of renewables is very good news for the planet.

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