Insight - Why a strong US economy matters
This insight by Richard Leather, Senior Trade & Investment Commissioner, USA and Deputy Consul-General, New York
This year, the US$15.9 trillion US market is predicted to grow nearly 3 per cent against a backdrop of low inflation, low interest rates, falling unemployment and lower power costs.
Profits from US corporations as a percentage of GDP are at all-time highs. Listed stock exchange indices are reaching historic highs and corporate balance sheets have been repaired, holding over US$1.5 trillion of cash in reserve – or about the same amount as the entire Australian superannuation funds pool.
Sometimes it is easy to overlook the fact that, despite the strong growth in China, the US will continue to be one of the largest and wealthiest markets well into the Asian Century.
But what does this mean for Australia?
The US is Australia’s third largest trading partner with US$40 billion in two-way trade, or 8.1 per cent of Australia’s total. Despite a sluggish economy, exports to the US grew 8.8 per cent in 2011-12, with exports of services growing 10.2 per cent to US$5.1 billion.
The US market is characterised by a deep and wealthy middle class and a growing corporate sector investing heavily in innovation, resources, oil and gas extraction.
A resurgent economy will benefit both Australian exporters with established US operations and those looking for new markets.
But the benefits of a robust US economy also extend to regional neighbours – Canada and Mexico, as well as enhancing growth in Latin America – benefiting Australian exporters in these markets.
And a buoyant US economy is great for investment in Australia and the rest of the world.
The US is the primary driver of global Foreign Direct Investment (FDI), with investment quadrupling over the past decade to over US$4 trillion.
In 2010 and 2011, 70 per cent of total US FDI was directed to developed economies, 20 per cent to Latin America, 15 per cent to Asia, 1.5 per cent Africa, and around 1 per cent to the Middle East.
The US remains Australia’s largest source of FDI, representing 24 per cent of stock. In 2012, US FDI stock rose 11.4 per cent to US$131 billion. And this was in a time when the economy was only starting to come out of recession.
US companies employ 425,000 Australians and underpin a great deal of innovation and economic growth in the Australian economy.
With improving business and economic fortunes, FDI will accelerate. The question is, what sectors will benefit?
US FDI patterns generally reflect core US economic trends. So as investment funds in the US economy shift from manufacturing to high technology services, US investment abroad focuses more on high technology, finance, and services industries located in highly developed countries.
This trend could lead to a new wave of productive FDI from the US into Australia.
Top Business Risks
OECD Guidelines for Multinational Enterprises
Multinational Enterprises should be aware of the OECD Guidelines for Multinational Enterprises that provide voluntary principles and standards for responsible business behaviour in a variety of areas, consistent with applicable domestic laws. These Guidelines are endorsed and promoted by the Australian Government. For more information, go to the AusNCP website.
Extractive Industries Transparency Initiative
The Extractive Industries Transparency Initiative (EITI) is a voluntary mechanism which promotes and supports improved governance in resource-rich countries through the full publication and verification of company payments and government revenues from oil, gas, and mining.
The EITI is supported by governments, industry, and non-government organisations around the world. The Australian Government supports the EITI and encourages Australian companies operating internationally to comply with its recommendations.
Bilateral agreements
Australia has social security agreements with several countries that address the issue of 'double super coverage' for employees sent to work overseas. To take advantage of these agreements, Australian employers sending employees overseas to work must apply to the Tax Office for a Certificate of coverage.
For more details, please visit the Australian Taxation Office website.
IP Passport fact sheets
These fact sheets outline foreign Intellectual Property (IP) regimes and some of the issues and challenges which may be faced by Australian exporters.
The current fact sheets are available on the IP Australia website.