Australia's Standard of Living Will Fall Unless The Real Exchange Rate Drops

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The outlook for Australia’s standard of living is bleak according to Professor Ross Garnaut and Melbourne University colleague Assistant Professor Leslie Martin writing in the AFR this morning.

Garnaut and Martin ask the question of whether “Australians continue to enjoy one of the highest levels of growth in living standards in the 21st century without doing much at all?”.

The behavioural finance guy in me says the framing of the question makes the answer obviously in the negative but Garnaut and Martin make a really good point about a shock that Australian workers may not understand.

They argue mining investment is still at boom levels and yet to actually fall off the cliff but when it does it will happen at a time when the economy is already looking weak.

Also citing the employment market, which is not keeping pace with working-age population growth, the low growth in wages and the fact that “new investment in export and import-competing industries shows few signs of life” as indicators that the economy faces a bleak future.

Key to their argument is Australia is too expensive a place to invest and do business in.

Garnaut and Martin say that:

There will be no investment revival in these industries until Australian cost levels relative to the rest of the world – the real exchange rate – have fallen a long way from current levels. The substantial exchange rate depreciation since early 2013 helps, but is nowhere near big enough.

There are a number of ways that can happen – the Aussie dollar can fall against our major trading partners, wages can drop, or not grow for an extended period, a combination of both or we can become more productive.

But Garnaut and Martin say there are no no signs of growth in multi-factor productivity of the Australian workforce and conclude “Australia does indeed have a sizeable problem, with the real prospect of falling living standards to 2020 if nothing is done to avert it”.

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