Whichever way you look at it, Australia has come to a crossroads. With the near death of manufacturing, the anticipated decline of mining and soft employment throughout the economy, new industries must be found to fuel growth into the future. Largely, these industries will be linked to the Asian middle class, natural resources other than minerals and a little bit of thinking outside the box.

Employment by Industry

The graph below shows changes in employment by industry from 1984 to 2014. The clearest take away from this graph is that as employment in manufacturing declined, services rose. This puts the furor over the recent death of car manufacturing into perspective. Indeed, the announced closure of Toyota, Holden and Ford are just the latest of a very long list of manufacturing businesses that have shifted away from Australia since the progressive removal of industry assistance in the 1980’s.

Employment by Industry (%) 1984-2014

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Is there anywhere but down?

At the same time that industry assistance was being reigned in, so too was business investment. In 1987 for every dollar invested in manufacturing there was $0.59 invested in mining. Now, for every $1 invested in manufacturing there is $10 invested in mining. This obviously indicates two things: the stagnation of manufacturing and exponential expansion of mining. In a macro sense, it shows where Australia’s comparative advantage exists. It hasn’t been manufacturing for a while.

Business Investment by Industry

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The Writing on the Wall

With decreasing government assistance and near stagnant business investment it is little wonder that manufacturing contribution to GDP has been in decline, falling to 7% in December 2013 from a high of 12% in 1986. Demonstrably, Australia’s future growth does not lie here. Mining, on the other hand, has been one of the heroes of Australian growth over the same period, increasing from 8% to 11%. The unsung hero however is the services sector, which contributes nearly 80% of national Australian growth.

Industry Value Added as % of GVA

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As the graph below shows, year-on-year GDP growth has ebbed since the GFC and this is despite the incredible investment of the mining boom and our foundation in services.

Australian GDP YOY Growth

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The slight uptick in growth at the end of the graph above has done little to ebb weak employment conditions. As the graph below shows the unemployment rate has steadily risen at the same time that participation has been in sharp decline. The most recent data shows that the unemployment rate remained at 5.8% while the participation rate continued to decline to 64.6%. This is indicative of an economy in transition and in need of new job creating industries.

Unemployment and Participation Rate 2007-2014

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Where to From Here?

Robert Burgess from the Business Spectator has made the case that Australia needs to make valuable things. This is not a cry for the resurgence of industry subsidies that some lobby groups would have. Rather it is a call for investment in ‘value added’ production. Burgess has struck upon the idea of government sanctioned tax holidays for businesses willing to invest in such production. This, he argues, would provide sufficient incentive to invest, lead to job creation and kick-start the value-added industries of tomorrow.

In a more detailed fashion, Deloitte determined the key sectors to achieve this are agribusiness, gas, tourism, international education and wealth management. All of which are services, minus agribusinesses and gas. Expressed in today’s dollars, these sectors could generate an additional $25 billion in 2033 alone and a cumulative net gain of $250 billion over the next two decades. Considering GDP was $ 390.3 billion in December 2013, their suggestions certainly warrant consideration.

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This growth opportunity is largely based on our proximity to the burgeoning Asian middle class who are increasingly wanting to eat quality produce, visit beautiful places, start cross border businesses and educate their children.

The key for businesses to exploit these opportunities, and create Australia’s comparative advantages, will only work if the right environment is created. Deloitte argue that government must play its role to ensure an environment where businesses can be dynamic and competitive.

Their suggestions won’t leave you wanting. Government must deliberately raise GDP growth by consolidating mature industries, wind back existing industry subsidies, and attract global companies to emerging industries in Australia. Further, they argue for the need to increase sectors’ exposure to high growth markets by terminating existing incentives to low growth sectors and prioritise investment into highest growth pockets. Clearly following the footsteps of Australia’s initial liberalization in the 1980s.

All of these efforts will mean little without a skilled workforce, a point Deloitte recognizes. They argue that the government must invest in education and training to ensure we have the workforce to realize this growth. This is key in any economy but particularly important for Australia considering the decline and near death of two major industries.

Conclusion

It is time to take stock. The Australian economy has undergone significant structural changes in the past thirty years. Such change is one of the ongoing features of all economies and in itself is not new. What is new is the lack of strategic plan for the future to sustain growth and create jobs. With a little bit of thought about our neighbors, what they want and where they want to go, Australia can ensure prosperity into the future.

 

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