Ian Macfarlane: Recent major developments in the Australian economy
Talk by Mr Ian Macfarlane, Governor of the Reserve Bank of Australia, to the World Economic
Forum Asia Pacific Economic Summit Melbourne, on 11 September 2000.
* * *
It is a pleasure to be speaking before the World Economic Forum again. I have done so before in Hong
Kong and Singapore, and I am proud that I can now add Melbourne to the list. It is also very pleasing
that the Forum has successfully expanded beyond its Davos base, and made the Asia Pacific region an
important part of its operations.
In the short time I have available tonight, I would like to outline some of the major developments in
the Australian economy over recent years, and then say a few words about the outlook. Where
possible, I will compare our performance to that of other countries. Inevitably, I will make a number
of comparisons with the United States as it is the yardstick by which everyone's performance seems to
be judged these days.
I will take as my starting point a comparison of economic growth rates of developed countries over the
most recent decade (Column 1 of Table 1). These figures from the OECD show that except for Ireland,
which is a very special case, the Australian growth rate has been higher than for any comparable
OECD country. For me, the interesting thing about this table is that this is the first decade in my
working life where Australia has figured in the top half of the table, let alone being virtually in the top
position.
Incidentally, these figures cover the whole decade and so include a recession for each country, usually
in the early part of the decade. This holds the average growth rates down. Another approach would be
to look at growth rates during current expansions. Up to the current quarter, our expansion has lasted
37 quarters and averaged growth of 4.1% per annum: the comparable figures for the United States are
38 quarters and 3.7% per annum.
If we turn to an international ranking of inflation rates over the past decade (Column 2 of Table 1),
Australia finishes in the middle of the field, with an average inflation rate of 2.3% per annum. This is a
huge improvement on recent decades, but, of course, virtually every country has shown a significant
improvement. There are a number of factors behind this improvement, but one I would like to mention
today is our monetary policy regime. Like a number of countries in the above list, Australia has a
monetary policy regime which is based on the trilogy of an inflation target, an independent central
bank and a floating exchange rate.
An important factor behind our good growth and low inflation has been our productivity performance.
Here, if we use the simplest measure of productivity, which is labour productivity, the pattern in
Australia is very similar to the pattern in the United States (Graph 1): strong growth in the 1960s, a
flattening out in the 1970s and 1980s, followed by a pick-up in growth in the 1990s. But the pick-up in
the 1990s in Australia has been more pronounced than in the United States. We have gone from
growth of 1.7% per annum to 3.0% per annum, whereas the United States went from growth of 1.5 er
cent per annum to 2% per annum.
I do not want to suggest that this means we have higher productivity than the United States; remember
we are only talking here about rates of change of productivity. The fact that we have been able to
speed up more than they have is, in large part, because we were starting from a lower base.
Incidentally, the OECD recently completed a study called "Is There A New Economy?" in which it
looked at similar calculations to the ones I have shown above for a range of countries. It found that out
of the 29 OECD economies, only six had achieved a higher trend growth of GDP per capita in the
1990s compared with the 1980s. They were the United States, Australia, Ireland, Denmark, Norway
and the Netherlands.
Table 1
Real GDP growth and consumer price inflation
Average annual rate (since 1990)
Country GDP Country GDI
Ireland 6.3 Japan 1.0
Australia 3.5 France 1.8
Norway 3.3 New Zealand 1.9
United States 3.3 Switzerland 2.1
Netherlands 2.9 Denmark 2.1
New Zealand 2.6 Finland 2.1
Canada 2.5 Canada 2.2
Spain 2.5 Belgium 2.3
Germany 2.2 Australia 2.3
Belgium 2.2 Netherlands 2.5
Denmark 2.1 Norway 2.5
United Kingdom 2.1 Germany 2.5
Finland 1.8 Ireland 2.6
France 1.7 Sweden 2.9
Japan 1.5 United States 3.0
Italy 1.5 United Kingdom 3.5
Sweden 1.4 Italy 3.8
Sweden 1.0 Spain 4.0
Source: OECD
Whilst I am on the subject of productivity, I want to make two general points:
The first is the obvious one which I have made on numerous occasions that the main reasons
•
behind the pick-up in productivity growth have been structural changes made over the past
15 years in the Australian economy which have increased flexibility and competitive
pressures. These changes include:
- further tariff reductions;
- financial deregulation;
- labour market deregulation;
- privatisation; and
- a more stringent regime of competition policy.
It has not been easy to put these changes in place, even though there has been for most of the
decade considerable bipartisan political support for change. Inevitably, compromises have
had to be made and, viewed in isolation, some of the individual changes do not look to be all
that thorough-going. But taken together, I think the total is larger than the sum of the
individual parts. Of course, one aspect of the economy that was not reformed during the
period covered by these calculations was the tax system. But that finally changed a couple of
months ago when a Goods and Services Tax was introduced to replace the old wholesale
sales tax and to take some of the weight off income taxes.
• The second point about productivity I want to make concerns the new economy/old economy
divide. Some people tend to judge a country's technological sophistication by, for example,
the number of listed companies in the IT sector. Although Australia has a number of
companies that fit this description, about 70 or so in fact, their combined share of the stock
market is not large by international standards. But that is only one measure of technological
sophistication. Another equally important one is the country's willingness to embrace new
technology. This may be a better guide to productivity improvements than focusing only on
the IT sector. I have two measures of the spread of technology:
- The first is Internet usage as a percentage of the population, which shows Australia in
a relatively high position among the countries compiled by the Consulting Group,
NUA (Table 2).
- A measure that is more specific to the business sector is the number of e-commerce
servers per head of population. On this measure, Australia is second only to the United
States (Table 3).
Table 2
Internet usage
(per cent of population)
Norway 50
United States 45
Sweden 44
Canada 43
Finland 38
Australia 36
Denmark 36
Netherlands 29
UK 27
Switzerland 23
Slovenia 23
Austria 23
Taiwan 22
South Korea 21
Belgium 20
Germany 19
Japan 17
Italy 16
Ireland 16
New Zealand 16
Source: nua.ie. Most data from late 1999-early 2000 surveys
Table 3
E-Commerce servers
Country/region Servers per million population
July 1998 March 2000
United States 55 170
Australia 35 119
New Zealand 25 93
Switzerland 22 92
Canada 31 87
Scandinavia 14 58
UK 12 55
Other EU 5 22
Japan 3 15
Korea 3 3
Source: www.netcraft.com and OECD
So, in terms of willingness to adapt to new information technology, Australia would get a very high
score. This, along with the measures I mentioned earlier, helps to explain why there has recently been
such a significant lift in the rate of growth of productivity.
A big lift in productivity growth has a beneficial effect on many areas of the economy. A lot of it is
passed through to consumers and, in the process, this makes it easier to maintain low inflation. Some
of it can also make businesses more profitable, which is, after all, the incentive that drives much of the
efforts towards improving productivity in the first place. The two broadest measures of corporate
profits as a percentage of GDP in Australia have been trending up over the past decade, with profits
after interest showing a much sharper rise than profits before interest, again another indirect benefit of
a low inflation (Graph 2) decade.
With good growth and good profitability, businesses have been keen to hire staff. As a result,
employment has grown strongly and the unemployment rate continues to decline (Graph 3). Again, a
comparison with the United States is interesting - during our expansion, the unemployment rate has
fallen by 4.8 percentage points compared with a fall of 3.7 percentage points for the United States. The
fact that their level of the unemployment rate, at 4.1%, is lower than ours, at 6.4%, is due to their
lower starting point, in part a result of the relatively mild nature of their early 1990s recession.
There are two other things I wish to touch on before concluding. The first is the exchange rate, which
has attracted a lot of attention and soul searching this year. It is surprising that in an economy showing
the medium-term characteristics I have just outlined, the exchange rate is so weak. If we refocus our
attention to the immediate period, the puzzle is, if anything, greater. We have an economy growing at
well over 4%, and probably more like 5%, with exports rising rapidly in the context of the strongest
world growth for a decade, rising commodity prices and high corporate profitability.
Why markets are placing such a low valuation on the Australian dollar is not a question I can easily
answer, any more than I can answer why valuations in some equity markets seem so high relative to
normal. These things can occur for periods in markets. They eventually come out right in most cases,
but it can take some time, and in the meantime the effect can be uncomfortable, unhelpful and even
damaging. For my part, I think that an important contributing factor this time is that markets
underestimated (and are still underestimating) the Australian economy's underlying strength. The
coincidence of a strong world economy plus a low Australian dollar is virtually unprecedented, and is
one of the several reasons why we at the Reserve Bank have been confident in the strength of the
Australian economy.
The influence of the world economy has been quite expansionary for Australia over the past year, most
notably in the form of a 28% increase in exports. This has been the result of both strong volume
growth and rising prices. Even with substantial growth in imports, the foreign balance is now making a
good contribution to Australian growth and, at the same time, reducing the current account deficit
(Graph 4).
The reduction in the current account deficit from 6% of GDP a few quarters ago to 4.9% now may not
look to be a big story. However, what is unusual about it is that it has occurred at a time when the
Australian economy has been growing strongly. In all other instances where a turnaround of this size
has occurred, a major cause has been a slowdown or contraction in the Australian economy (and
consequent fall in imports). On this occasion, the manner of the improvement in the current account
portends much better for the future.
Conclusion
We are now in the tenth year of our current expansion, and are in much better shape than in the mature
phase of previous expansions. This year is an eventful one in that it contains a number of one-off
occurrences such as the Y2K changeover, the introduction of the GST and, in a few days, the Olympic
Games. These events have the effect of adding to demand and of shifting it around from month to
month and quarter to quarter. This is making a number of indicators of the economy more difficult to
read than normal, but I do not think it alters the overall assessment that this is an economy which
retains a fair bit of momentum, and where the economic fundamentals, both here and abroad, are
continuing to provide a stimulus to growth.