Scott Morrison, widely expected to be appointed Australia’s new treasurer early next week, can’t change the world. Or at least not over the next year or so. But he can reinterpret it, and that’s sometimes as much as a treasurer can do.
He should and probably will promptly cancel whatever overseas travel plans Joe Hockey had pencilled in for the rest of the year. That might be interpreted as a want of interest in the rest of the world, but the truth is that Morrison will lose crucial time and learn nothing of value by attending, say, the upcoming IMF-World Bank annual meetings in Lima, with its associated G20 Finance Ministers and Central Bank Governors meeting.
Foreign ministers get a lot out of talking to other foreign ministers. Finance ministers get more out of reading the numbers. Almost everything that matters in economic policy you could once read in the newspapers, and now – even better – you can read with greater timeliness and detail online. Sometimes treasurers do need to talk to each other to do deals. But right now there are none to be done that require ours.
He needs to quickly learn about how things are in the rest of the world. The best way to do it will be to stay at home and spend the weekend digesting the briefing papers Treasury is no doubt preparing for him. When he has, he will probably come to the conclusion that things are perhaps not quite as grim as some of his more despondent friends in business have been telling him.
It is true that Canada and Brazil are battling recession, hit by the same decline in global commodity prices that has hit the value of Australian exports. Its also true that growth in New Zealand has slowed sharply for similar reasons, that Japan’s GDP contracted in the second quarter, that Russia is in trouble, that China’s GDP growth has slipped from over 10% five years ago to under 7% today, that global trade growth is slower than global GDP growth for the first time in decades and that global GDP itself is expanding only very modestly.
But it’s also true, Treasury will tell him, that the US upswing is robust, that Germany is growing and the Euro area as a whole is inching ahead, and that while Japan had a poor second quarter, it’s likely expanding in this quarter and will end the year a little up. The biggest question mark is over China, as we explored here last week.
The transitioning economy
Growth in China has certainly slowed sharply compared to 2010, but over the last few years the slowdown has been mild. Despite the excitement of global share markets, there is not much in recent China data to suggest the expected slowdown is markedly faster than before, or that the usual problems in making a big change in a country’s economic structure have proven insurmountable. Last year the service sector contributed more to GDP growth than the industrial sector, and consumption more than investment. Both are signs that the necessary transition away from growth based exclusively on manufacturing, investment and exports is actually happening.
There is certainly a risk that China will fumble the transition, Morrison will probably be told, but the balance of probabilities is still that growth will decline slowly to 6% or so within a year or two, and 5% in the next decade. Already the world’s largest economy using the IMF measure purchasing power parity, China’s economy in ten years will still likely be nearly two thirds bigger than it is now, and it will still in all probability be growing faster than the average of the rest of the world (or of our own economy). That will still be a great boon for Australia.
Meanwhile, Morrison will read, Australia’s economy (if not its mood) has been surprisingly resilient in the face of slow global growth and in particular China’s slowdown and the fall in iron ore and other commodity prices. Because of lower prices, the value of exports was down 5% in the year to June. The volume of exports was up, however, by 5%. The increase in volumes was not just in metals and minerals. Farm exports have been strong. Service exports increased by over 7% in volume. Export growth contributed around half of Australia’s total growth over the last year.
The Australian slowdown, Morrison will perceive, has not been driven by exports, not by China and not by slow global GDP growth. Morrison will see that the Australian slowdown is due to slow government investment spending, the inevitable and long expected decline in mining investment as the large number of projects initiated over the last decade are completed and household consumption spending growth, which while a little faster than GDP growth as a whole, is slower that it has been on average over the last couple of decades.
Not only is Australia getting by, as far as the impact of the rest of world is concerned, it has a chance of doing better. The vast and certain increase in LNG exports over the next few years will flatten the trade numbers, even if the income due to Australian residents is meagre. And the markedly lower Australian dollar will help service, rural and manufacturing exports.
Treasury will tell Morrison that because of falling export prices real incomes for Australians have declined and will continue to do so. He should press them to explain that this is only so if real income is measured by deflating export values by the increase in import prices, implicitly supposing export income is measured by its equivalent in imports. If household income or wage income is instead deflated by the consumer price index or by the consumer price index relevant to wage income, real incomes are still increasing – though not by much.
Morrison will likely end his weekend with the gloomy realisation that his problems as treasurer are less likely to arise from a global economic slowdown than from the intractability of the budget problems he faces. His overwhelming priority is the Mid Year Economic and Fiscal Outlook (MYEFO), probably now being worked on in Treasury and due for release in three months. His briefing papers ought to give him a preliminary indication of what it will say.
Long before the May 2016 Budget, the mid-December MYEFO will spell out just how tough the numbers remain. When looking at the numbers he will be reminded that under Joe Hockey, fiscal warrior as he is, Government spending has on average been growing somewhat faster than it did under his predecessor, and as a share of GDP the deficits have been just as big. Australia’s economic performance this fiscal year may come in not too much under Treasury forecasts, but it will need only a small downward revision of the cheerful forecasts for next year’s real and nominal GDP to see the MYEFO trace out a markedly higher deficit path for that and future years.
If that is what Morrison discovers on the weekend, figuring out what to do about it and (just as importantly) what to say about it will weigh on his mind over the next few months.
Here’s a tip for him: he should quickly hire a good senior economic adviser for his personal office. Liberal Treasurers are inclined to bring in ideologically sympathetic advisers with business backgrounds. By the time they have begun to understand how it works in Canberra, their minister has moved on. If Morrison has the wit to bring in a well trained, strong economist from the mid-level of Treasury who can help him interpret the world, he will long be thankful he did so.
John Edwards is a member of the RBA board and Adjunct Professor with the John Curtin Institute of Public Policy at Curtin University.
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