The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox! In this week’s blog: Australian economic briefing UK economic briefing Australian economic briefing by David Rumbens This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia. From banana republic to record breaker – 30 years of the Australian economy In 1988, Access Economics was established to contribute to a better Australia. 30 years later, we’re celebrating this milestone with Deloitte Access Economics still providing economic solutions to Australians. The Australian economy has had a fascinating journey over that period, and this week we look back at that story. Far from the shrill calls in the early and mid-1980s that Australia risked becoming a ‘banana republic’ and the ‘poor white trash of Asia’, our economy has produced, via a mix of both good management and good luck, a remarkable period of prosperity over the past 30 years. Indeed, it’s arguable that the foundations of modern Australia’s prosperity were increasingly in place by the time the then Access Economics was founded in 1988. That doesn’t mean the last three decades haven’t been without their bumps and jolts. By 1988, Australia had already floated the $A and made other reforms to reinvigorate the economy. Growth was strong, and the unemployment rate was falling. The Black Monday stock market crash of 1987 was already in the rear-view mirror, property markets were riding high and it was a period of optimism. But that optimism was misplaced. In 1990–1991 Australia experienced, in the words of then Treasurer Paul Keating, ‘the recession we had to have’. High corporate debt levels, bloated property prices, high interest rates and a U.S. recession all likely contributed. The economy shrank by about 1½%, with the most severe impacts felt in Victoria and South Australia. The unemployment rate ballooned, rising from just under 6% to over 11% – more than 400,000 people joined the jobless queue, which totalled nearly one million. Chart 1: Australian GDP growth and the unemployment rate, 1988–2018 Source: ABS No one knew it at the time, but the end of that recession also marked the beginning of the longest period of uninterrupted economic growth ever recorded for any developed country. Ever. We’re currently at 27 years, and still counting. One major benefit of that ‘recession we had to have’ was that it killed the inflation bogeyman. Inflation averaged over 9% per year in the 20 years to 1990, but it’s been 2½% per year on average over the past 20 years, bang on the middle of the RBA’s target set in 1993. During the 90s, the economy grew at a strong and sustained pace, and the unemployment rate was whittled down to its pre-recession level. The economic reforms enacted during the 80s and 90s were increasingly paying dividends, with the resulting strong productivity growth propelling the economy along. The 1997 Asian financial crisis, which dominated the news at the time, had little perceptible impact on Australia’s economy. Around the time Sydney hosted the 2000 Olympics, the excitement about the fledgling internet sector quickly turned into the ‘tech wreck’ in the US share market. The US entered recession, and Australia’s economic growth weakened. It also heralded a seismic shift, with China emerging as a significant driver of our economic activity. During the 2000s, China’s meteoric economic rise was causing waves in commodity markets. Money was now pouring into the Australian economy as the value of iron ore and coal exports soared. It was an income bonanza. The Federal government, awash with cash, was able to wipe out its net debt, establish the Future Fund and sprinkle the electorate with a series of income tax cuts – all at the same time. They were rosy times. Mining investment was surging, wage growth was strong, and the unemployment rate ground down to multi-decade lows. But a year after the first iPhone hit the market, what seemed almost too good to be true turned out to be just that: the collapse of Lehman Brothers in September 2008 shocked financial markets into a panicked freeze, and the world fell into its deepest recession since the Great Depression. Australia pulled out all stops to avoid recession here at home – slashing interest rates from over 7% to just 3%, and throwing $52 billion at the economy in government spending and handouts. Our economy did take a hit, but the experience was nowhere near as bad as in most developed economies. Also helping Australia was the massive economic stimulus in China, which quite soon had commodity prices and mining investment back on track. While we avoided disaster, the GFC ushered in a slow-burn economy, one that was firing on only three cylinders. When the mining investment boom – the main growth engine at this point – turned into a bust after 2012, the result was a strikingly unusual slow and sustained rise in the unemployment rate, which rose to be higher than during the GFC. But cuts to interest rates saw the nation move from a China boom to a house price boom. As the Australian business sector found its stride again too, job growth became rapid, while the biggest concern became ever-falling wage growth. And that brings us to today. Right now the Australian economy is in a good place. Even though housing markets are cooling, the economy is growing strongly. Wage growth is edging up slightly and the jobless rate is down to just 5%, which is the conventional measure in Australia of ‘full employment’. That’s a pretty good spot to be. What next? The Fourth Industrial Revolution, the Asian Century, ageing populations, climate change. These are just some of the mega-trends of the future that will influence Australia’s economic fortunes, and while we can hope the next 30 years will be just as prosperous, we can be fairly sure they will be just as colourful. For more information on the Australian brief, please contact co-authors David Rumbens and Craig Michaels. UK economic briefing by Ian Stewart A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/ Austerity may be dead, but what about government debt? The financial crisis, recession and a slow recovery played havoc with the UK’s public finances, leaving the government with the largest ever peacetime budget deficit. The process of repairing the public finances has been slow. But, over time, tax rises and a squeeze on spending have worked. Last year government borrowing dropped to the lowest level since 2001. This year borrowing will be significantly lower. Meanwhile surveys show that the British public have grown weary of austerity. The National Centre for Social Research reports that the proportion of voters who favour increased public expenditure and higher taxes has nearly doubled from 31% to 60% since 2010. The Prime Minister tapped into this mood at the Conservative Party earlier this month, proclaiming an end to austerity. This represents a major change in policy and a daunting challenge. Three obstacles stand in the way. First, eight years of austerity have only slowed the deterioration in the public sector balance sheet. The government is still at least five years away from being able to repay debt or reverse the decline in the public finances. Last week the International Monetary Fund ranked the UK as having the second weakest public sector balance sheet – comparing assets against long-term liabilities such as debt and pensions commitments – of 32 nations. Only Portugal ranks lower. Several developing economies, including Russia, India and Turkey, have stronger finances. Second, demand for public services is set to rise for decades to come and from a starting point of stretched provision. An ageing population means that spending on social care, health and pensions is set to soar. The costs are eye watering. The ratio of public debt-to-GDP currently stands at 85%, or £1.8 trillion, the highest level in over 40 years. Unless entitlements are cut, or taxes raised, the government’s independent budget watchdog, the Office for Budget Responsibility (OBR), estimates that the debt-to-GDP ratio will rise three-fold, to 280%, in 50 years’ time. Third, the OBR expects Brexit to slow GDP growth over the next five years. This comes on top of a decline in the OBR’s estimate of the UK’s long-term growth rate caused by a reassessment of the outlook for productivity. So the official view is that a sustained rebound in growth – the usual catalyst for big reductions in public sector indebtedness – is less likely to come to the rescue this time. So can the government end austerity? On the debt front the government’s main target is to eliminate the deficit by the mid-2020s. To do so, and end the squeeze on public spending, will need faster growth. That is not what the official forecasters, or independent forecasters such as the Institute for Fiscal Studies, expect. If stronger growth doesn’t materialise the only way of balancing the books and raising public spending is to increase taxation. The head of the OBR, Robert Chote, recently said that “small tax rises of 1.9% of GDP each decade” would offer a realistic and politically palatable way to do so. As is the case in so much of economics there are no easy solutions only trade-offs. For public sector austerity to end without pushing the UK further into debt is likely to mean a dose of private sector austerity – in the form of higher taxes. The last word on all of this belongs to the Oxford economist and academic, Martin Slater, who recently published a brilliant account of two centuries of UK government spending and borrowing, “The National Debt, A Short History”. Other than cutting spending or boosting taxes the only way of eliminating a deficit, Dr. Slater writes, is through, “a return to higher rates of economic growth, or improvements in the efficiency of delivery of government services, but the latter is much easier to imagine than to implement. History suggests that actually the likeliest saviour is always economic growth”. We must hope that history is on our side this time. PS: In last week’s Monday Briefing we noted that the Bank of England chief economist Andy Haldane said there is “compelling evidence of a new dawn breaking for pay growth”. Evidence that this dawn may be upon us came last week with the release of official data showing that UK average earnings grew by 3.1% in the three months to the end of August on a year earlier, the fastest pace since the financial crisis.