Phil Ruthven looks at what is in store for Australia and the global economy in 2015.

    In the industrial age up to the mid-1960s, companies focused more on the inside of their businesses when planning for the year ahead: an inside-out or fortress planning mentality.  However, in this new age and over the past 50 years, we are developing more of an outside-in or transparent planning orientation in the operation of our businesses

    In the business world, survival and success depends on what we need to worry about, rather than what we do worry about, as the result of too much information and opinion from the media, colleagues and the well-intentioned.

    In this review of the coming year, I will focus on a handful of external environments and their possible impact on Australia, knowing full well the likelihood of any unforeseen shocks that may emerge.

    World environment
    It is now clear that the world’s eight economic regions and 230 nations, including principalities and soverign states, can be separated into yesterday’s and tomorrow’s world. The European Union (EU), Japan and the USA, once had over 55 per cent of world GDP (purchasing power parity) in the late 1990s. It is now only 42 per cent and falling fast. For the EU, sadly, we are seeing the second “fall of the Roman Empire”.  Its members are almost all deep in debt, taxed to the gunwales, burdened with excess rules and regulations, largely nanny states and poorly led. Japan is in a similar position; and in addition, has the world’s worst government debt at over 250 per cent of GDP.  Japan will recover, slowly, but with weak long-term growth. The US has better prospects, but will spend a long time regaining its momentum.  Yesterday’s world.

    The Asian mega-region – made up of the Asia Pacific (less Japan) and the Indian sub-continent – accounts for 35 per cent of world GDP, and is growing three times as fast (around 7 per cent) as the group above. Today’s and tomorrow’s world. Fortunately, this is now Australia’s home economic region where over 80 per cent of our trade takes place and two-thirds of all inbound tourism and immigration. But it is a vibrant and competitive mega-region, and Australia must lift its game to be a meaningful member and neighbour.

    World growth is expected to be marginally higher in 2015 at 3.3 per cent, than 2014, but provided predominantly from Asia. The outlook for the world’s top 20 nations, accounting for almost 80 per cent of world GDP, is shown in figure 1. The polarisation between the old and the new is obvious.

    Economic Growth Graph 2015 Forecast

    Interest rates are expected to rise a little, and exchange rates to return to more realistic/true levels before possibly beginning to rise again, mainly against the US dollar later in the decade and again pass parity by 2020; perhaps even heading for US$1.20: $A1.00. It will be scary if it happens.

    The probable cause of such a development would be inflation in the US after all the quantitative easing. Runaway inflation for several years is very tempting to governments with huge national debts, as it dilutes the debt relative to GDP and brings the ratio back to a safe level – under 65 per cent – from the current level of around 115 per cent (worse in many EU nations and Japan).

    Terrorism will also continue to be a distraction, rather than anything too serious for Australia.

    Australia’s economy
    While our economy has been slowing in 2014 to an estimated growth in GDP of 2.8 per cent for the calendar year, there is a chance it will be stronger in 2015, although still below our very long-term average of 3.5 per cent. Figure 2 shows our pattern of growth over the 54 years since 1960.  The forecast is merely one scenario of many although the average growth implied is probably close to the eventuality.

    2014 Australia's Economic Growth Graph

    Our economy is prone to a recession at the end of each business cycle; the next danger year being 2017/18. All recessions have been due to a collapse in capital expenditure, but never due to a collapse in consumption expenditure, or exports.

    Such a collapse in investment in the 2001 financial year, was avoided by boosting the housing sector with first home buyers’ grants of $7,000 in 2000 and $14,000, in later years.

    No such incentive was needed in 2009 due to the massive backlog in mining investment; although the Rudd government still gave away huge amounts of spending money to households, exacerbating the deficit for no useful purpose. Households already had been at least $10,000 or more better off than the previous year due to the fall in mortgage interest rates from 9.25 per cent to 5.25 per cent and a sharp fall in petrol prices.

    Governments at state and federal level are concerned about the tailing-off of mining investment (but not volume outputs), and are sensibly looking at filling that hole with other infrastructure spending. So no need for fear, yet, about any recession over the next few years.  And we may just avoid one in 2018. If we do, we will have been recession-free for more than a quarter of a century. This in itself carries the danger of complacency.

    Inflation is likely to be held within the Reserve Bank of Australia’s guidelines, and interest rates are likely to rise a little as suggested earlier. Mortgage rates are likely to rise from the record post World War II level of <5 per cent that has prevailed in the second half of 2014; and given that the very long term average rate has been nearer to 7.75 per cent, we are due for rises in the years ahead as the GFC impact is ameliorated.

    Productivity is already back above our long-term average of 1.7 per cent, exceeding 2 per cent in the 2014 financial year, so less of a worry.  However, it is the not-for-profit sectors (dominated by government ownership) that take up more than 22 per cent of our economy that are the ongoing recalcitrant problem. Their productivity growth in the five years to 2014 was minus 0.4 per cent. These sectors include education, health, public administration and safety, utilities and public transport. They need serious panel-beating or privatisation.

    Government and industry
    So what are the overall reforms needed to be implemented by governments, and are they being addressed? Some are, most are not. Sadly, the two most important are not being addressed.

    The first of these is industrial relations reform suitable to our new age, not the long-gone industrial age of 50 years ago. The second is fast broadband, so vital to the digital-disruption era we have entered, and lagging behind most OECD nations and many nations in our own region of the Asia-Pacific. Both of these are a worry now that we are a part of that world’s fastest-growing region, the fastest modernising region, and the world’s most competitive region.

    And what of the fastest and slowest growing industries in 2015 and beyond?  These will be health, mining, professional and technical services and finance and insurance. The slowest will be manufacturing, agriculture, utilities and media.

    Finally, jobs. Contrary to the fears of those that have lost their jobs over the past five years, those job losses – being 146,800 – were far and away exceeded by the 944,500 new jobs created – over six times as many. 

    Over the next five years, that ratio of new to lost jobs could increase; and some 95 per cent of all new jobs are expected to be in the new age service industries. The losses, probably under 100,000, are expected to be in manufacturing, mining and agriculture.

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