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It’s time to decide!

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By Martin Conboy.

What is it about an election campaign that prompts people to run for cover and not make any decisions? Irrespective of whoever wins the Australian election on September 7, nothing much will change in the economy. The sun will still rise and we will still go off to work everyday as we always have done and always will do in the future.

If you are wondering who’s going to win, the liberal country party coalition would appear to have a slight edge, but the incumbent Labour Party, after having changed leaders will make it a very tight contest.

There is an interesting website  – Vote Compass (http://www.abc.net.au/votecompass/) which is an educational tool developed by a non-profit group of political scientists and hosted by the ABC. You just answer a short series of questions to discover how you fit into the Australian political landscape.  I did it myself and was surprised where I ended up on the spectrum.

In the last 10 years Australia’s terms of trade have risen because of the mining boom. Not only have we sold a greater quantity of our products and services, but also we received more money for it.

But does this mean that we are better off? Not necessarily so!

For a start if the demand for our goods rises, the demand for the A $ also rises and our currency would appreciate, as it has done since the year 2000. For example in 2003 the Australian currency was around US $0.75, for most of the last three years it has been well above US $1.0, which basically means that 30% of the benefit of our currency has been lost.

The relative price of our exports in terms of our imports is reflected in Australia’s terms of trade, which rose over .4% in 2011/ 12.

The price of our exports is measured in US dollar terms; therefore if we convert the value of the exports to US dollars for 2011/12 it is US$ 331 billion. If the A$/US$ were at $US 0.75 the value of our exports would have been US$441 billion. However as the A$ has been higher it has cost us over US $100 billion in the value of our exports.

The rise in the A$ has really hurt our country. Our exports have become more expensive and are imports cheaper. The tourism industry in particular has suffered because the country has become so expensive in US dollar terms. We can also see what is happening to our manufacturing sector and in particular the Auto manufacturers.

It’s very hard for them to compete against much less expensive imports. Now as the Australian dollar starts to lose some of its value, we should see more Australians holidaying at home instead of flying overseas to take advantage of the high Australian dollar.

The fall in the A$ will soften the downturn in exports but not entirely. The terms of trade is now declining. This will lead to depreciation in the currency and a boost to some of our local industries. Historically the A$ is still very high, although that could change.

Our local BPO industry will no doubt appreciate a bit of breathing space; at the time of writing one Australian dollar buys US$0.91. Anecdotally we are now aware of Asian-based BPO providers offering agent per hour rates of seven dollars, comparing that to a floor price of $A 45 per agent hour, it is easy to see why people are outsourcing to Asia.

As our economy grows, the rate of growth slows-this is to be expected. A few years ago growth may have been 10% but that figure has fallen and must continue to fall. That does not mean that the country has ground to a halt-on the contrary-the country relative to our European cousins is still booming. The construction bubble may have stopped for the moment, however with our historically low interest rates, we are already starting to see the green shoots of an investor led housing recovery.

The sub text of the narrative is China and Australia’s luck in having the natural resources that China needs.

Half of China’s population lives on farms and the urbanisation that started 20 years ago continues unabated. In fact in the 2011 five-year plan the central government mandated that the economy would move from a manufacturing based economy to a services-based economy.  An interesting footnote is that they wish to have 10,000,000 call centre agents servicing their middle class by 2016. It sounds like a huge number, but it is less than 1 % of their population.

As a general rule of thumb western countries have about 2 % of their working population working in call centre and outsourcing related businesses.

300 million Chinese will move into cities in the next 15 years. That’s like rehousing Australia’s entire population every year. Interestingly that is the population of Europe so needless to say demand for raw materials will continue.

The infrastructure required is enormous: 1,000,000 km of new roads, 28,000 km of metro rail, 170 mass transit rail systems, 97 new airports and more than double the energy generation of today. Talk about scary numbers.

That is not to say that it will be smooth sailing. They will be ups and downs, as there always is. I believe that the assumption that China is about to fall into a big black hole is exaggerated.

On another front and more worrying, are signs that all is not well in Chinese credit markets. There has been a surge in interest rates recently and this has been widely reported, it may simply reflect liquidity tightness in the system or it could also reflect Chinese banks willingness to lend to each other, as there are rumours that some Chinese banks are about to fail.

Economists estimate that China’s corporate debt plus the local government financing vehicle debt, which is the local government companies, is around 150% of GDP. A corporate debt above 120% of GDP is considered high.

Australia’s total net foreign debt as a proportion of GDP has increased 2.5 percentage points since December 2010 to 50.9 per cent of GDP. Therefore it becomes clear that Australia’s current debt position, in both gross and net terms, is still very low compared to many other countries that is why we keep our triple A credit rating.

Given this known global demand  for skilled workers it is hard to understand why the Australian government is not investing more in our TAFE and universities. The number of graduates coming out of Asian universities is staggering beyond belief. Western  companies who want to access those graduates  find themselves hiring them directly via online platforms like freelancer.com or outsourcing to the BPO service providers  that employ these bright young knowledge workers

 
August 22, 2013
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