What Next, Australia?

Australia is no longer immune to the stagnation in the West. Despite a resilient housing market, Australia’s economy is slowing. With a worsening labor market, consumption is eroding, along with business confidence.

In the past two years, the benchmark interest rate has been almost halved to 2.5 percent. Still, Australia’s real GDP growth is likely to decrease to 2.4 percent during the ongoing year and will remain barely 2 percent until the mid-2010s.

Australia is at a new crossroads.

Short-term gains, medium-term erosion

In the past decade or so, exported commodities fueled Australia’s terms of trade, thanks to rising commodity prices. While agriculture and natural resources each account for barely 3-5 percent of GDP respectively, they contribute substantially to export performance. True, the service sector of the economy, including tourism, education, and financial services, continues to account for some 70 percent of GDP. However, the country’s abundant and diverse natural resources attract substantial foreign investment.

Before the global financial crisis, the Australian economy grew for 17 consecutive years. As export-led growth collapsed worldwide, then-Prime Minister Kevin Rudd’s Labor government introduced a US$50 billion fiscal stimulus package to offset the effect of the slowing world economy, while the Reserve Bank of Australia (RBA) cut interest rates to historic lows. Further, China’s 2009 stimulus package sustained demand for commodities from Australia.

Except for just one quarter of negative growth, Australia actually grew by 1.4 percent in 2009. Last year, growth amounted to 3.3 percent, whereas unemployment was 5.2 percent. However, despite past efforts to refocus on increasing economic productivity, Australia’s growth has been driven somewhat narrowly by a mining investment boom, which has rendered the economy more vulnerable to trade shocks.

In the past decade, iron ore, coal, gold and natural gas have been Australia’s major commodities, but new industries are gradually coming to the fore. These opportunities comprise food manufacturing, oil and gas extraction, beer manufacturing, education services and legal services.

The short-term picture is bright, but medium-term erosion is the new reality.

Deepening political divisions

The erosion of growth is amplifying pressures between and within both major parties. In mid-October, the Occupy Sydney movement protested in front of the central bank. Barely a month later, Prime Minister Tony Abbott’s business advisor Maurice Newman criticized the Labor government’s “class warfare particularly aimed at business,” healthcare programs for Australians with disabilities, the proposed reforms to school funding, too-high wages and too-rigid industrial relations.

Today, Australia is one of the world’s wealthiest nations, second to Switzerland in average wealth and the richest in terms of median wealth, according to the Credit Suisse 2013 Global Wealth Report. But it is also the eighth most unequal country among the OECD club. In the coming years, the long-held Australian dream of “fair go” is likely to erode further — particularly in view of the deepening internal divisions of the center-left Labor Party, ever since the premierships of Bob Hawke and Paul Keating.

Recently, former Prime Minister Kevin Rudd bid an emotional farewell to politics. After he first took the office in 2007, infighting in the Labor Party caused him to lose the post to Julia Gillard in 2010. Last June, he reclaimed his post, which helped the Labor Party gain back some of the ground it had lost under Gillard, but not enough to beat Abbott. In the process, Rudd used strong-arm political tactics and compromised his positions — e.g. emissions trading scheme, mining tax — that contributed to popular disillusionment.

In September elections, Tony Abbott led the center-right Liberal/National Coalition to victory. That very same day he ordered the ending of the carbon tax and the halting of asylum-seeker boats. For months, Abbott has promised to prune government expenditure and cut taxes domestically, while arguing that Australia’s “foreign policy should have Jakarta rather than a Geneva focus.”

Dual interests

Over recent decades, Australia’s foreign relations have been driven by a close association with Washington, but also by a desire to develop relationships with Asia and the Pacific. The former is driven by security objectives, the latter by economic needs.

In trade, Australia has hedged its bets by ensuring its presence in both U.S.- and China-led blocs. Washington is in a hurry to complete a Trans-Pacific Partnership (TPP), which includes Australia, but excludes China. In turn, the TPP has intensified talks at a Regional Comprehensive Economic Partnership (RCEP), which excludes the U.S., but includes China — and Australia.

In security, Australia’s position has been shaped by its historical, though ambivalent relationship with the West. Since World War Two, the Australia, New Zealand and U.S. Security Treaty (ANZUS) has bound the three nations in the Pacific. Following 9/11, Australia has spent over a decade conducting counter-insurgency campaigns in both Afghanistan and Iraq. But now the status quo is changing.

As Washington began its pivot toward Asia, it intensified cooperation with Australia and New Zealand. Australia is no longer seen as “down under,” but as “top center.” In November 2011 U.S. President Obama and then-Australian Prime Minister Julia Gillard met in Canberra to announce plans for a sustained U.S. presence on Australian soil. For the first time since World War Two, Australian and U.S. strategic priorities are overlapping, say analysts in Washington. As a result, Australia is encouraged to improve its longer-range air capabilities with nuclear-powered submarines, unmanned underwater vehicles and submarine tenders.

Due to its inherent contradictions — Western identity, but Asian geography — Australia’s approach to security has historically been more nuanced in comparison to its Western allies, however. Consequently, Canberra is more likely to hedge between the U.S. strategic opportunities, which can ensure political stability, and the Chinese economic gains, which are needed for economic growth.

Australia’s path

From the U.S. perspective, Australia, located between the Indian and Pacific Oceans, is ideally positioned as a gatekeeper over contested waters and preserving crisis stability in Asia.

From the Australian perspective, the bilateral interests are converging in security matters, but diverging in trade and investment.

It is this duality of interests — not convergence — that will account for Australia’s economic and strategic policies in the coming years.

In Asia Pacific, the new grand strategy may not satisfy any constituency fully, but all partially. In Canberra’s view, that’s enough because the alternatives are worse.

This commentary was originally released as “A shifting global economy brings Australia to a crossroads” by Reuters on November 29, 2013