Australia’s trade and investment linked to Asia’s powerhouse economies

Australia’s economic growth will remain solid over the next five years, according to the latest International Monetary Fund’s (IMF) World Economic Outlook. The strength of Australia’s economy reflects the country’s unique position in the world’s fastest-growing economic region – Asia.

During the past 20 years, the size of the Chinese and Indian economies has grown by a factor of seven as measured by GDP, adjusted for purchasing power parity (PPP). As a result, these two countries’ share of the global economy has grown two and half-fold, to 26%.

Over the same period, ASEAN–10 (Association of Southeast Asian Nations) countries have also raised their share of the world economy. Having quadrupled their nominal output value over two decades, ASEAN countries now account for 6.3% of the world economy.

Over the next five years, the IMF expects the Asia-Pacific region to continue to grow quickly, rising by around 7% per year. This means the region will shortly account for over 45% of the world’s economic output.

Australia’s stellar economic performance

According to the National Accounts for the December quarter 2018 ^[1] released by the Australian Bureau of Statistics, Australia’s economy has officially recorded 27 years of uninterrupted annual growth. The figures demonstrate the resilience of the Australian economy and the strength of our nation’s economic management.

This is an achievement unequalled by any other developed economy. Australia’s average real GDP growth rate since 1992 is around 3.2% per year, and the economic fundamentals ^[2] are in place for this trend to continue.

According to the latest World Economic Outlook report, the IMF forecasts Australia’s real GDP will grow by an average rate of 2.7% per year between 2019 and 2023, up from an average growth rate of 2.6% between 2014 and 2018. This is the highest projected rate among major advanced economies.

Trade is partly responsible. Australia has 11 free trade agreements (FTAs) with individual countries and groups of countries. A number of other agreements are currently under negotiation. The countries covered by these FTAs account for almost 70% of Australia’s total trade.

With several FTAs under negotiation, the expanding network of agreements will provide a wider range of trade and investment opportunities. They will also enhance Australia’s ability to capitalise on regional growth. Investment frameworks established by these agreements support a more attractive investment environment and help drive further economic integration in Asia.

The importance of being near Asia

In recent years, strong Asian demand for Australia’s natural resources and agricultural products has been the main driver of Australia’s growth. Meanwhile, increased Asian demand for Australia’s education, tourism and other professional services has boosted Australia’s economy.

Australian businesses, exporters and communities have expanded their footprint across the Asian region to capitalise on the demand for Australian goods and services. In 2017–18, trade with Asia represented about two-thirds (A$526 billion) of Australia’s two-way trade in goods and services (A$799 billion). Twelve economies out of Australia’s top 15 trading partners are now in the region.

Meanwhile, Japan, China, Singapore and Hong Kong have emerged as significant sources of foreign direct investment (FDI) into Australia. These economies’ stock of FDI in Australia has grown (CAGR) by 11% per year between 2011 and 2017, to A$186 billion. This compares with an FDI stock value of A$190 billion for investment from the United States, which has grown by 8.6% per year over the same period.

China, India and Southeast Asia

Sustained economic growth in China and India will be the twin pillars of Asia’s contribution to world output growth. The IMF estimates the total output of China and India grew by a CAGR of 10.5% between 1998 and 2018. The combined GDP of these two Asian powerhouses will continue to grow by 8.5% per year to 2023 and reach US$54 trillion (adjusted for PPP valuation). The total value of their combined estimated output in 2023 represents over 30% of the predicted world total, according to the IMF.

Southeast Asia is also growing strongly. The combined output of Indonesia, Thailand, Malaysia and other Southeast Asian nations (except Singapore) is expected to rise solidly with a CAGR of more than 7% to 2023. As a result, these countries will make a strong contribution to regional growth.

With a population of over 600 million and a combined GDP of about US$8 trillion (adjusted for PPP valuation), ASEAN economies have initiated a new strategy to transform the bloc into a more competitive and resilient economic region, and finally integrate itself into the global economy by 2025.

Additionally, newly industrialised economies (NIEs) in Asia – South Korea, Taiwan, Hong Kong and Singapore – will likely expand at a CAGR of 4.5% to 2023. The combined share of ASEAN and NIEs’ production will represent about 9.6% of total world output.

For further economic commentary and analysis of the major trends and events that shape Australia’s trade and investment performance, visit Economics at Austrade.