Australia 2038: Q&A with Macquarie’s Chief Economist

Sydney, 01 May 2018

For the 20th anniversary of the Macquarie Australia Conference, Macquarie’s Chief Economist Ric Deverell looks at Australia’s growth over the past two decades and discusses what 2038 may hold. He says the country is uniquely placed to thrive in the years ahead.

Looking back at Australia’s economy over the last 20 years, what has stood out most for you?

Economic performance over the past 20 years has dramatically outperformed expectations, with Australia being the only major economy not to experience a recession in that period. This performance has been all the more impressive given that we have negotiated two major events, either one of which would have been expected to result in a major economic recession.

  • As China’s growth vastly exceeded most expectations, it drove a once in a life time commodity prices spike – the so called ‘super cycle’. This saw Australia’s terms of trade increase to historically high levels and mining investment as a share of GDP increase to nearly three times the previous historical high. The boom turned to a bust following the great recession, and investment has now fallen back toward previous levels.
  • The second major event was the global financial crisis, with global GDP falling for the first time in decades, as the North Atlantic financial system collapsed.

In 1998, if you told any economist that we would have the biggest commodity boom and bust or the largest global economic downturn since the great depression of the 1930s and that Australia would escape without a recession, they would have told you that you were dreaming.

Why is Australia uniquely placed to thrive in the coming decades?

Australia is very well placed as we go forward, for several reasons. We’ve done a lot of microeconomic reform, so the economy is reasonably flexible, with the exchange rate acting as a very effective shock absorber. Australia also has rapid population growth compared to the rest of the industrialised world and that inflow of people, particularly younger people, has meant that we don’t face demographic challenges to the same extent that other countries do.

After 200 years in which people talked about the tyranny of distance for Australia, we are finally in the part of the world with the best growth outlook. Being in close proximity to the Asian economies is very helpful in terms of expanding our export base.

You’ve identified infrastructure as one of the key growth areas of the economy, what factors are driving that?

Both our major cities, Melbourne and Sydney, are forecast to increase their populations to seven million in the next 20 years. To accommodate that growth and increase productivity in those cities, we will need to maintain a high level of infrastructure spending. Transport infrastructure is very important – for general amenity and productivity in a big city, the key is to allow people to move around and a substantial increase in transport infrastructure investment is required.

As cities get bigger, you need people to be able to live further away from the central business district and commute into work efficiently. If you don’t build that infrastructure, everyone wants to live closer and it puts enormous pressure on house prices.

In your view, many of the current fears about the effects of technological change and innovation are overblown – why should we remain focused on the advantages?  

Technological change has always been part of human existence. While the rate of technological change and the rate of disruption has accelerated, if you go back through the past century, there are lots of examples where people have expressed concerns very similar to those of the current age.

There will be changes in the way the labour market operates as a result of automation, but it does not follow that this means that we won’t have jobs for everyone. Indeed the evidence to date is that technological change actually adds to labour demand, with the new jobs often of a higher quality than the more manual tasks that have been automated. Ultimately, mechanisation is a good thing because it helps us all to be more productive.

You’ve said the global energy market will undergo dramatic change over the next 20 years. What are the opportunities for Australia in this evolving energy landscape?

Australia has become an energy super power over the past 20 years. We have seen a significant increase in our thermal coal exports over the past 10 years.  In addition, the investment in LNG capacity over the past decade will see Australia become one of the world’s top two LNG exporters.

Energy forecasts show that the really big growth in the energy market is likely to happen in renewables. Many companies are investing heavily in renewable technology at the moment and it’s a good example of how technology is going to materially change the structure of the economy. There are many innovative companies in Australia that are likely to benefit from that change and the opportunities it provides.

What do you expect Australia’s housing market to look like over the next 20 years?

Australia’s house prices have increased substantially over the past seven or eight years. However, in the most recent 12 months, the pace of house price growth has slowed substantially. My expectation is that house prices will most likely move sideways over the next decade. I think the really big adjustment up has happened and we’ll now have a considerable period of consolidation.

If we’re right in terms of population projections, we are going to need to build a lot more housing and within that we’re going to have to build higher density housing. That means the mix of housing is likely to change. There will be continued high levels of construction, but it does not follow that rapid population growth means that prices have to move higher again.

The Australian advantage: A 20-year outlook

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