Core arguments and facts of the 2018 Benchmark Report: Robust Growth

06 Feb 2018

Tags

  • Edmund Tang
  • Benchmark Report
  • Australian Economy

Following my previous post where I introduced the 2018 Benchmark Report (BMR), I want to look in a bit more detail at some of the core arguments and facts of the BMR. The Report is structured around five main reasons for investing in Australia – Robust Growth, Dynamic Industries, Innovation and Skills, Global Ties and Strong Foundations – and compares Australia’s credentials with other major economies across each category. In this post, the focus is on the Robust Growth story.

The Australian economy’s resilience is sustained by robust policy frameworks, strong institutions, a sophisticated financial system, an attractive investment environment and deep trade ties with the Asian region. Growing 3.2 per cent on average each year since 1992 (see chart below), Australia is the only major developed economy to have recorded no annual recessions from 1992 to 2017 and is now in its 27th year of consecutive growth.

Economic resilience - real GDP growth, 1992-2017

The key message here is that Australia’s economy has outperformed its peers for more than two decades and the country is achieving great success in global industries. Along with the factors identified above, Australia’s impressive economic outcome also reflects its smart people, sophisticated services sector, abundant natural resources, strategic location close to booming Asia, and the agility to adapt to changes in the global economy.

Looking forward, the IMF is predicting that Australia’s economic performance will remain solid on the back of the stabilisation of global commodity prices, a steady recovery in the Eurozone, stronger growth in the US and improved outlook of Chinese economies.

Our region, the Asia-Pacific, is not only strategically important for Australia, but also for the international economy overall, with the IMF forecasting the region will account for 45 per cent of global production (US$168 trillion) in terms of purchasing power parity valuation by 2022, more than double the ratio (21 per cent) in 1982. Over the same period, the combined economies of China and India will likely represent almost 30 per cent of the world’s GDP, significantly up from around six per cent four decades ago.

According to the IMF’s October 2017 World Economic Outlook, Australia is expected to realise average annual real GDP growth of 2.8 per cent between 2018 and 2022 – the highest among major advanced economies and up from an average growth rate of 2.4 per cent between 2013 and 2017 (see chart below).

Real GDP growth by economic grouping

Australia has been successfully managing its transition to broader-based drivers of economic growth. Adjustments in interest rates, changes in the Australian dollar exchange rate, and moderate wage growth are all working to shift resources from mining-related sectors to the service sectors. In this regard it’s important to recognise that the Australian economy is more diversified than its export basket might suggest, and is already heavily based on services, with the combined services sector accounting for over three quarters of real industry output.

Overall, Australia’s service sector has grown by an average of 3.6 per cent per annum since 1992. Among all services industries, Information Media and Telecommunications, Professional, Scientific and Technical services, and Financial and Insurance services have risen by average of around five per cent a year over the same period, reflecting the country’s skills base in technology- and knowledge-intensive sectors (see chart below).

Growth by industry in Australia

Regarding the assessment of Australia’s Government balance sheets and fiscal policy, Australia is one of a small handful of governments with a AAA rating worldwide. This top credit rating reinforces our other strong economic fundamentals, and is supported by a track-record of fiscal responsibility.

The following chart showing low Government debt in the BMR demonstrates the Australian public sector’s healthy financial position and underpins its strong sovereign ratings. The IMF in its October 2017 Fiscal Monitor estimated that the Australian Government’s net debt would be around 20 per cent of GDP in 2018, well below the 72 per cent forecast for advanced economies as a group. Australian Government debt is predicted to fall below 16 per cent of GDP by 2022, while the average debt ratio of advanced economies will remain at about 69 per cent of GDP (see chart below).

General Government net debt - 2018