Ric Battellino: Twenty years of economic growth
Address by Mr Ric Battellino, Deputy Governor of the Reserve Bank of Australia, to Moreton
Bay Regional Council, Redcliffe, Queensland, 20 August 2010.
* * *
I would like to thank my colleagues in the Bank's Economic Group for their assistance with this talk, particularly
Susan Black and Cathie Close.
1. Introduction
The Australian economy has started what will be its twentieth year of economic growth. This
has been a remarkable performance - one that is unprecedented both in Australia's
economic history and among other developed economies over this period. It raises a number
of interesting questions:

why was Australia able to record such a good performance; were we just lucky, or
were there economic policy decisions that contributed to it?

how has this growth been distributed across the nation? and
 what is the likelihood of it continuing?
I would like to focus on these issues in my talk today, but, before I do, it might be useful if I
set out some facts and figures.
2. Historical and international comparisons
Following the recession in the early 1990s, the Australian economy began to grow again in
the September quarter 1991 (Graph 1). In the period since, the economy has grown in every
quarter except three.
Graph 1
There were a couple of periods when economic growth slowed noticeably, but at no time did
year-ended growth turn negative. The lowest rate that year-ended growth fell to was
0.7 per cent. That was in the year to the March quarter 2009. The other slowdown was in
2000-2001, when growth slowed to 1.4 per cent.
I should note that, while growth remained positive, both these slowdowns in economic
activity did cause a noticeable rise in unemployment.
The period since 1991 is the longest period of growth that Australia has recorded for at least
the past century. The next longest period during which year-ended growth remained positive
was the 13 years between 1961 and 1974.1 In the 1970s and 1980s, growth phases typically
lasted only seven or eight years before another recession hit.
As I mentioned, no other developed economy has experienced uninterrupted growth over the
past 20 years. In fact, many developed economies have experienced two episodes of negative
growth during that period: one in 2001 following the collapse of the dot-com bubble; and one in
2008 following the collapse of the US sub-prime housing bubble. Even among the fast-growing
emerging economies, such an extended period of growth is rare, as most of these countries
were affected at some point by the various crises that occurred over that period.
Australia's performance, therefore, is quite unusual and I think it is worth spending some time
thinking about how it was achieved.
3. Factors contributing to this performance
Part of the growth came, of course, from the fact that the population grew strongly over the
period, particularly in recent years. Some people might also say that Australia was just lucky:
that it was well-placed to take advantage of the emergence of China, both in terms of its
location and the composition of its exports. I think these factors have played a role, but they
are only a small part of the explanation. The China story has been significant only over the
past five years; most of its significance still lies ahead. Remember, too, that the country that
was our main export market, Japan, has experienced very subdued economic growth over
the past 20 years, and that several other of our Asian trading partners experienced a very
severe economic crisis in the 1990s. I would therefore conclude that our luck has been
somewhat mixed, and we need to look to other factors to explain Australia's good growth
performance.
I won't pretend to be able to provide a detailed analysis of these factors in the short time
available today, but I do want to highlight a couple of factors I think have been important.
These are the increased flexibility of the Australian economy and the pursuit of prudent and
disciplined financial policies.
The Australian economy over the past 20 years has shown a greater degree of flexibility than
was the case in the 1970s and 1980s. This has made it more resilient to the various external
shocks that have been experienced over the period: the Asian crisis; the collapse of the
dot-com bubble; and the recent collapse of the US sub-prime credit bubble, to name some of
the more severe.
One of the key elements in that flexibility has been the floating exchange rate. The Australian
dollar has played an important countercyclical role by rising and falling in response to various
external events that otherwise might have had the potential to destabilise the domestic
economy. This was evident both during the Asian crisis and the dot-com bubble, when the
Australian dollar fell sharply in response to deteriorating economic conditions abroad, helping
to insulate the domestic economy.
Evidence of the role played by the exchange rate in stabilising the economy can also be
seen in recent years. The Australian dollar rose strongly between 2006 and 2008 as
commodity prices rose, which helped to dissipate pressures that would otherwise have
caused the economy to overheat. Conversely, the temporary, but sharp, fall in the exchange
rate during the recent financial crisis helped cushion the economy on the downside.
Given the consistent way in which the exchange rate has moved to insulate the economy
from various external shocks, I would have to conclude that the decision to float the
exchange rate in 1983 ranks among the most important economic reforms, if not the most
important reform, of the past 30 years.
But other reforms have also clearly played a role:

a wide range of reforms to competition and industry policy, implemented over many
years, have seen the business sector become more outward-looking and competitive;

labour market reforms, some extending back to the late 1980s, gave the labour
market increased flexibility to respond to changing economic conditions without
producing large swings in unemployment or unsustainable pressures on wages; and
 various reforms of the financial system gave it greater capacity to meet the financing
needs of the economy and made Australia more attractive to foreign investors.
In total, these reforms contributed to a substantial pick-up in productivity in the 1990s. The
Bank estimates that, during that decade, Australia was able to produce an extra 11⁄2 per cent
of output per year simply by using capital and labour more efficiently (Table 1).
Table 1
Output growth
All industries
Contributions to GDP growth
GDP growth
(percentage points)*
Average annual Multifactor
Labour Capital
percentage change productivity
1990/91 to 2000/01 3.6 0.8 1.3 1.5
2000/01 to 2008/09 3.2 1.0 1.8 0.4
1990/91 to 2008/09 3.4 0.9 1.5 1.0
* Estimates based on a Cobb-Douglas production function.
Sources: ABS; RBA.
Unfortunately, this growth in productivity appears to have slowed substantially more recently.
Perhaps this is partly a measurement problem, since the large shifts we have seen in the
composition and pricing of output in recent years may have complicated the measurement
task. Some of the slowdown in productivity is also a reflection of the economy being relatively
fully employed in recent years. It is also possible, however, that the slowing in productivity
growth is due to the fading effects of the earlier economic reforms.
Output growth has not slowed as much as productivity in recent years, because businesses
have been applying increased amounts of labour, and particularly capital, to production.
Business investment in recent years has risen to a very high level relative to GDP, one of the
highest among the developed economies (Graph 2). Employment growth has also been
strong. Nonetheless, the slowdown in productivity growth has meant that GDP growth in the
latest decade was not as fast as in the previous decade.
Graph 2
Disciplined economic policies also contributed to the good economic performance of the past
20 years. They have prevented the build-up of imbalances that might otherwise have
threatened the economy, as occurred frequently in the 1970s and 1980s.
Government budget finances were greatly improved during the period. Budget surpluses were
recorded in 10 of the 19 years since 1991. Government debt was reduced sharply, leaving
Australia as one of the best positioned developed economies in terms of government finances.
Monetary policy helped keep inflation low, providing a stable environment in which
businesses and households could plan and undertake their economic activities. Since
inflation targeting began in 1993, inflation has averaged 2.7 per cent, a little above the
midpoint of the target range (Graph 3).
Graph 3
4. How has this growth been distributed through the economy?
Economic growth is important because it allows living standards to rise and more people to
find work. The benefits that have flowed to Australians in this respect over the past couple of
decades have been impressive. Since June 1991, 3.5 million new jobs have been created
and income per household has risen by a cumulative 30 per cent in real terms (Graphs 4
and 5).
Graph 4
Graph 5
The increase in jobs, which represented a rise of 2 per cent per year on average, was faster
than the growth in the population, and was met partly by an increase in the proportion of the
working-age population that is in the workforce, and partly by a decline in unemployment.
Over the period, the unemployment rate fell from 9 per cent to a little over 5 per cent.
One question of interest is how the benefits of this growth were distributed through the
community. There are various ways to look at this: one is across the states; another is across
the income distribution; and a third is across industries.
Let me start with a comparison of the states. The key point that stands out is that all the
states shared in the growth over the period, though Queensland and Western Australia grew
faster than the others. As can be seen in Table 2, growth in gross state product in
Queensland averaged 4.8 per cent per year, and that in Western Australia, 4.5 per cent. The
other states averaged between 2.8 per cent and 3.7 per cent. Population shifts explain most
of this gap, however, and on a per-capita basis growth in gross state product was more
uniform.
Table 2
State economic indicators
1991/92 to 2008/09; annual average growth, per cent
NSW VIC QLD WA SA TAS
Gross state product 2.8 3.7 4.8 4.5 2.9 2.9
Population 1.0 1.2 2.2 1.8 0.6 0.4
Gross state product per capita 1.8 2.5 2.6 2.7 2.3 2.5
Source: ABS.
All the states also experienced large falls in unemployment over the past couple of decades
(Table 3). In fact, the states with the highest unemployment rates in 1991 generally
experienced larger falls. At present, the rate of unemployment is fairly uniform across the
states, with the exceptions of Western Australia, where it is below average, and Tasmania,
where it is above average.
Table 3
Unemployment rates by state
Seasonally adjusted, per cent
NSW VIC QLD WA SA TAS
September 1991 9.4 10.3 9.4 10.6 10.4 10.6
Current (July 2010) 5.6 5.5 5.6 4.4 5.1 6.5
Source: ABS.
The benefits of growth were also spread fairly widely across households at different points of
the income distribution. Income relativities across the bulk of the population did not change
much over the period, though the relative position of households in the top 10 per cent of the
income distribution improved somewhat, and that of households in the lowest 10 per cent
deteriorated (Graph 6).
Graph 6
Table 4
GDP by industry*
Per cent of total
Industry 2008/09 1991/92 Difference
Financial & insurance services 10.8 7.0 3.8
Education, health & social assistance 10.4 10.8 -0.4
Retail & wholesale trade 9.6 10.2 -0.6
Manufacturing 9.4 14.0 -4.6
Ownership of dwellings 8.0 8.9 -0.9
Administrative (including public
administration & safety) 8.0 7.9 0.1
Mining 7.7 5.0 2.7
Construction 7.4 6.3 1.1
Professional, scientific & technical
services 6.1 4.3 1.8
Transport, postal & warehousing 5.8 5.6 0.2
Utilities, accommodation & food services 5.0 6.4 -1.4
Information media & telecommunications 3.4 4.1 -0.7
Rental, hiring & real estate services 3.0 3.1 -0.1
Arts, recreation and other services 2.8 3.1 -0.3
Agriculture, forestry & fishing 2.6 3.3 -0.7
Total 100.0 100.0
One area where there have been sizeable differences in growth performance has been
across industries. The output of the mining, financial services and professional services
industries grew at a much faster rate than average, while the output of the manufacturing
sector increased by less than average (Table 4). Around three-quarters of the economy now
involves the production of services rather than goods, and the financial sector has replaced
manufacturing as the largest single industry in the economy.
While many people lament the small share of manufacturing sector in the Australian
economy, the low exposure to manufacturing may have been one reason why the economy
has fared relatively well over the past couple of decades. It meant that Australia was less
affected than many other countries by the global shift of manufacturing to emerging markets,
particularly Asia, that took place over that period.
5. Current conditions
Let me turn now to the current state of the economy, and the prospects for the next few years.
As you know, the Australian economy recovered relatively quickly from the slowdown that
followed the global financial crisis. It is currently growing at around its trend rate, in part due to a
large increase in government spending. Consumer spending remains relatively restrained, even
though consumer confidence is high. It seems that households have become more cautious in
their financial habits, borrowing less and saving more. The household saving rate has risen
back to around 4 per cent over the past year, after being close to zero in the early part of the
decade (Graph 7). Investment in new housing is also growing at only a modest pace, despite
fast growth in the population. This is because of the relatively high cost of housing, rigidities in
the housing supply process and difficulties for developers in obtaining finance.
Graph 7
Business investment, however, is at very high levels. It did decline somewhat during the
financial crisis, but it is expected to increase strongly again over the period ahead, driven
importantly by the mining sector.
Exports are also increasing at a solid pace at present, as earlier increases in mining capacity
are coming on stream. Together with much higher export prices, this has meant that the
trade account of the balance of payments has moved strongly back into surplus, an unusual
situation for Australia.
Employment has been growing strongly, in fact more strongly than would normally be
associated with recent rates of increase in GDP, and the unemployment rate has fallen
significantly since mid 2009, to around 51⁄4 per cent (Graph 8).
Graph 8
As I mentioned earlier, over the past couple of decades the typical pattern had been for
growth in the resource-rich states of Queensland and Western Australia to be faster than the
average of the other states. Currently, however, that is not the case. Queensland is lagging
the other states, with relatively weak growth in retail sales and consumption, and particularly
business investment (Table 5). Over the past year, Queensland has experienced little growth
in final demand, whereas in the rest of Australia demand grew by close to its highs of the
past decade (Graph 9). Part of the problem is that Queensland seems to be suffering from an
overhang in the property market after a period of exuberance in the lead-up to the financial
crisis. Apartment building outside Brisbane is especially weak, as is commercial building. The
high exchange rate is, of course, also affecting the tourism industry in Queensland, as
Australians are taking advantage of cheaper foreign holidays.
Graph 9
Table 5
State economic indicators
Percentage change over past 12 months*
NSW VIC QLD WA SA TAS
State final demand (sa, per
cent) 4.7 6.4 0.3 6.1 5.2 3.1
Consumption 2.8 3.3 1.8 5.9 3.3 3.0
Dwelling investment 0.1 0.6 1.3 5.0 -8.1 6.8
Business investment 1.9 10.4 -17.8 0.6 -0.7 -24.3
Government 13.4 12.8 10.6 14.5 17.7 15.8
Employment (sa)
Per cent 1.4 3.6 2.9 5.2 2.2 -0.1
Number ('000) 48 98 66 60 18 0
* State final demand data are over the year to the March quarter 2010; employment data are over the year to
July 2010.
Source: ABS.
6. Outlook
Our expectation is that economic growth in Australia will continue for at least the next couple
of years, the period for which the Bank typically prepares forecasts. Our latest forecasts,
which were published earlier this month, show growth in the Australian economy continuing
at a solid pace over this period.
This view is partly based on the expectation that the world economy will continue the
expansion that began in 2009. World economic growth is estimated at about 41⁄2 per cent for
this year, which is above average - in other words, quite a healthy outcome.
Growth in our major trading partners, a group that is more heavily weighted to the
fastgrowing economies of Asia, is expected to be even stronger this year.
Despite the good performance of the past year, there has been considerable discussion in
recent months about whether the global economy can continue to grow solidly in the face of
the financial problems it has been experiencing, particularly the overhang of government
debt in many countries. However, while official forecasters around the world all acknowledge
that this is a potential risk to growth, they are nonetheless forecasting that the global
economy will grow at a reasonable pace over the next couple of years. This is the Reserve
Bank's view as well.
The strong growth of the global economy over the past year or so has again pushed up the
prices of commodities that Australia produces. They have returned to the high peaks reached
before the onset of the global financial crisis in 2008. Relative to prices of our imports, export
prices are at their highest level in 60 years (Graph 10). This is generating a large increase in
income for the country: we are forecasting that Australia's gross income (in nominal terms)
will rise by about 10 per cent this year.
Graph 10
We expect that export prices will ease back somewhat over the next couple of years, as
more supply comes on stream and as economic growth in our trading partners slows to a
more sustainable rate. Nevertheless, by historical standards, prices will still be very high.
This creates a very favourable environment for the Australian economy. Household income
will most likely rise quite solidly, which should underpin consumption even if households
maintain their recent higher rate of savings.
Most importantly, however, we think that economic growth will be driven by strong business
investment. This will be concentrated in the mining and gas industries, including some large
projects that are planned here in Queensland. Mining investment typically runs at about 13⁄4 per
cent of GDP, and in past mining booms it has reached up to 3 per cent of GDP (Graph 11). In
the current boom, it has already risen to 41⁄4 per cent and, even on conservative assumptions, is
expected to rise significantly in the years ahead. That will provide a major impetus to growth.
Graph 11
Even outside mining, investment is likely to rise, given that capacity constraints exist in many
parts of the economy. This expansion in business investment is expected to outweigh the
planned scaling back of government spending.
In this environment, we see further growth in employment, probably continuing to run ahead
of growth in the labour force, so that unemployment will continue on a downward trend.
One issue is whether the strength of the economy will have implications for inflation. At
present, underlying inflation has fallen back into the top half of the target range after rising
noticeably over the second half of 2007 and 2008. We expect that it will stay around its
current rate for the next year or so but, after that, upward pressure on inflation is again likely
to emerge with a strongly growing economy. History tells us that inflation can be a problem
during resources booms, and while there are grounds for thinking it will be less of a problem
this time than in the past, we need to remain alert to the risks.
While Australia will, most likely, continue to do well over the next few years, it would be a
mistake to assume that the economic cycle has been eliminated. We also need to recognise
that it is difficult to foresee what will happen in the future, and that there are risks regarding
the future path of the economy. It is possible, for example, that growth in the world economy
will lose momentum, creating a significantly less favourable environment for Australia than is
currently assumed. Both the volume and price of our exports would be weaker and external
financing might also be more difficult. On the other hand, it could also turn out that
inflationary pressures build more quickly than assumed.
7. Conclusion
Let me conclude.
Australia has delivered a very good growth performance over the past couple of decades.
That was the benefit that flowed from a long process of economic reform and the adoption of
prudent and disciplined economic policies. Even though there was significant variation in
growth across industries, the benefits of growth were spread relatively widely across the
states and across the income distribution of the population.
It is reasonable to expect that further growth lies ahead. However, with the economy now
operating close to its capacity, it will take further improvement in productivity and disciplined
policies for this growth to be sustained.