Australia's reliance on bubbles
From the turn of the century Australia relied on bubbles for income growth and job creation: first a housing bubble then a mineral price bubble. House prices rose sharply until the Global Financial Crisis. The house price bubble gave homeowners large capital gains and with them, a sense of rapidly rising wealth.
Australians began spending more and saving less. It reached the point where the household savings ratio fell from its long-term average of around 10 per cent to below zero – households were actually spending more than they were earning. When the Global Financial Crisis hit the housing bubble burst. Worried about losing their jobs, householders became more prudent, returning their savings ratio to 10 per cent.
As the housing bubble was inflating, a mineral price bubble joined it from 2004. China’s voracious appetite for minerals and the inability of supplying countries to quickly expand mine capacity caused mineral prices to reach 140-year highs.
The trouble with bubbles
Just as the housing bubble had to burst so the mineral price bubble has deflated. As China moves past its metals-intensive development stage and more mine production hits the market, the mineral price bubble will deflate even further. The trouble is bubbles can never be a source of sustainable economic growth and job creation.
A new housing bubble
Now, house prices are re-inflating and the household savings ratio has fallen from 10.6 per cent to 9.7 per cent, causing celebration among people claiming the economy is recovering. To his credit, Treasurer Hockey has not joined those celebrations.
Sustainable growth requires competitiveness and productivity growth
In a small, open economy like Australia’s the only sources of sustainable growth are improving international competitiveness and increasing productivity growth. A depreciating exchange rate is helping lift our competitiveness. For this to have a real, lasting effect, the increased cost of living from higher import prices cannot simply flow through into higher money incomes.
Wages growth is the slowest in at least 16 years. But middle-class welfare payments will need to be reduced further, following the abolition of the Baby Bonus in recent years, the means testing of the private health insurance rebate and tighter eligibility for family payments. New middle-class expenditures such as the proposed new paid parental leave scheme and increased eligibility for the Seniors Health Card are not affordable out of our reduced national income.