Australia is a country in search of a growth engine now that the sweet spot of the mining investment boom has passed and the terms of trade have crashed.
HSBC Australia’s Chief Economist Paul Bloxham believes it’s Australia’s service sector that is going to provide this growth engine as the economy re-balances. That’s instead of manufacturing, which many observers appear to focus on.
Bloxham says that while much of Australia’s service sector (which makes up 75% of Australian GDP) is driven by local demand, “think haircuts and doctors’ appointments”, he expects that service exports will be a big part of the re-balance.
While smaller than resources exports, services exports are still hefty, accounting for around 18% of total exports, led by education and tourism. These sectors have been picking up over the past year, driven by the on-going rise in middle class incomes across Asia, particularly in China, and the lower AUD. Chinese tourist arrivals have more than doubled over the past five years and overall student enrolments have risen by 12% over the past year, led by Chinese students. Services exports rose by AUD3.7bn (7%) in 2014, which more than offset the AUD3.5bn fall in the value of iron ore exports over that period.
The lower Aussie dollar also helps because it discourages overseas travel and foreign purchases of goods. According to Bloxham, the big fall into the mid-70 cent region supports domestic spending.
Importantly, he says an increase in services will create more jobs than the mining boom. “After all, the services sector accounts for around 80% of employment in
Australia, while mining only accounts for 2%,” he said.
That’s important because even though last week’s employment data showed 37,700 jobs were created in March, at 6.1% Australia’s unemployment rate is still elevated.