Budget explainer: the forces influencing Australia’s economy

Tim Robinson, University of Melbourne

It’s going to be a great year for Australia, it’s going to be a positive year for the economy.


I am more positive about Australia than I have ever been. We are in a great position at the moment. On the economy, despite the domestic challenges, we are delivering the jobs, and importantly it is going to get better this year.

– Treasurer Joe Hockey, Jan 19, 2015 Neil Mitchell, 3AW

Was Hockey right to be so confident? As we head into the federal budget tonight, all eyes will be on how the Coalition government might tackle some challenging economic data affecting Australia’s economy. Here’s a quick explainer of the major factors affecting revenues and the outlook.

Falling commodity prices

This should be a familiar story to most Australians by now. Over the last 10 years, Australia’s economy has ridden on the wave of a sharp rise in the terms of trade (the ratio of export to import prices). This was mainly driven by higher bulk commodity prices, including iron ore and coking coal, which are key inputs in the production of steel, driven by strong demand growth from China. This resulted in a massive investment boom to increase capacity, much of which recently has coming online.


Figure ABS, Gillitzer and Kearns (2005)

The Department of Industry and Science has forecast growth in global iron ore trade (in tonnages) in 2015 will exceed 4%, with Australia accounting for around 5.5 percentage points. That Australian growth may outstrip global supply reflects an expectation that higher cost producers elsewhere will reduce production.


Figure Department of Industry and Science (2015)


Consequently, supply growth, including from Australia, has been weighing on commodity prices. But it’s not all supply. China last year imported around two-thirds of globally traded iron ore, and growth in the Chinese economy has been slowing. Growth in fixed asset investment, which contributes to demand for crude steel, has declined, with the Chinese housing sector weak. Chinese crude steel production is down from a year ago, and while the Department of Industry and Science forecast that growth will return, it will be much more modest.


Figure WorldSteel Association (worldsteel), Department of Industry and Science (2015) Note: Forecasts are from Department of Industry and Science (2015).


What this means is that the recent falls in the terms of trade reflect both supply and demand-side factors. They considerably impinge upon Federal Government revenues, most directly through company tax receipts.

Looking forward, in the next financial year LNG exports will grow substantially as expansions in capacity become productive, supporting overall output growth.

Rising unemployment

Outside of the resources sector, growth in the Australian economy appears to be soft. While overall output growth grew by a moderately below-trend 2.5% over the year to the December quarter, this partially reflected the strong growth in resource exports. Alternatively, domestic final demand growth, which excludes both net exports and inventories, was weak (1.2%).


Figure ABS


This soft output growth outside of the resources sector, together with resources companies reducing jobs, has resulted in the unemployment rate gradually increasing to 6.2%.

This is higher than estimates of the non-accelerating inflation rate of unemployment – the level of the unemployment rate consistent with unchanged inflation – although such estimates are inherently uncertain. Nonetheless, this signals that the economy is currently operating beneath its capacity. The under-utilisation rate – which also takes into account people working fewer hours than they desire – paints an even softer picture.


Figure ABS


So, considerable slack exists in the labour market. This is restraining growth in wages, and therefore inflation.

But low wages growth also acts to restrain disposable income and hence consumption growth. Consumer sentiment, as measured by the Westpac-Melbourne Institute survey, is presently is below average. In particular, respondents’ views about their families’ finances currently compared to a year ago and future economic conditions are weak.


Figure ABS


Sectors outside the resources sector

There is evidence that some sectors of the economy are moving out from the shadow of the resources sector. In particular, residential construction has been growing strongly, with rising dwelling approvals suggesting that this will continue.


Australian Bureau of Statistics


But as residential investment is only a small share of the overall economy, its contribution to overall growth is insufficient to offset the falls in mining investment.

Growth in service exports has also improved, mainly reflecting tourism and education. Service exports are the second largest component of Australian exports, but are considerably smaller than resource exports.

A key factor influencing the demand of non-resource exports is Australia’s international competitiveness. Historically the real exchange rate (a measure of competitiveness) and the terms of trade have tended to move together over the medium term. Since the peak in the terms of trade the real exchange rate has fallen by nearly 13%.

A further improvement in competitiveness would promote Australia’s non-resource exports, helping to re-balance the sources of growth, and one way this could occur is through a depreciation in the nominal exchange rate.


Figure Atkin, Caputo, Robinson and Wang (2014), RBA, ABS


Investment and confidence

Ultimately, what is necessary is an upswing in non-mining business investment. Here, there are mixed signals that businesses are ready to invest. Business credit growth, a timely indicator of the state of the business sector, has picked up, but remains subdued. The ABS Capital Expenditure survey (capex) asks businesses about their investment intentions and provides another important signal about the outlook. For the mining sector, the capex survey points to sizeable falls in nominal mining investment both this financial year and next. For the non-mining sector it is a less useful indicator, reflecting coverage issues, but it suggests little growth is likely.


Figure Melbourne Institute, ABS


Investment is volatile and modelling it is difficult, which makes it tough to pick when non-mining investment will improve. While the prevailing exceptionally low interest rates should be supportive – with the Reserve Bank of Australia recently cutting the cash rate to 2% – weak business sentiment has been attributed as one restraining factor. Business conditions, according to the NAB Monthly Business Survey, have improved relative to this time last year, although a further strengthening is necessary for a sustained upswing in non-mining investment.

Overall, the Australian economy is in a situation where falling commodity prices are weighing on income growth and domestic final demand growth is soft and is likely to remain so in the near term, limiting the scope for any improvement in unemployment. This is a difficult environment in which to narrow the deficit.

Read other federal budget explainers here.

Tim Robinson does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

Swans remind Buddy of rare blank

Teammates haven’t let Lance Franklin forget going goalless for the first time in more than a year.


The 2014 Coleman Medallist failed to kick a goal for the first time in 23 AFL games in Sydney’s win over Melbourne at the MCG last Saturday.

“It was quite funny, one of the boys actually put some doughnuts in my locker this week, and had a little bit of a laugh at that,” Franklin said at the SCG on Tuesday.

With 16 goals to his name so far, Franklin has four more than the corresponding stage last season.

The powerful forward wasn’t irked by his failure to register anything more substantial than a couple of behinds against Melbourne.

“Not at all, it’s all about a team game and playing a role for your football club,” Franklin said.

He proved there was more to his game than just kicking goals by picking up a personal season-high 22 touches against Melbourne

However, the 28-year-old spearhead warned there was plenty of personal and team upside left after the Swans’ 4-2 start.

“I think my form has been okay, but there’s still a lot of improvement not only in me, but improvement in all players on our list,” Franklin said.

“We’ve been up and down at times this season, but from this point on we want to play as consistent football as we can and it starts this week.”

Next up for the Swans is a Saturday night assignment at ANZ Stadium, against Geelong, the team Franklin has his worst winning percentage against, with just five victories in 17 games.

He played for Hawthorn during their infamous “Kennett Curse” period against the Cats, but his only game for Sydney against Geelong resulted in a whopping 110-point victory for the Swans at the SCG last year.

“We haven’t thought about that game at all,” Franklin said.

Hospital volunteers abused girl: inquiry

A girl who became suicidal after repeated sexual abuse at Melbourne’s Royal Children’s Hospital was told it was illegal to make prank calls when she tried to alert staff to the attacks.


The woman, known as AWI, has told a federal inquiry she was repeatedly sexually abused by hospital volunteer Harry Pueschel and once by another unnamed volunteer in 1981, when she was 11 years old.

The Royal Commission into Institutional Responses to Child Sexual Abuse is exploring the allegations and whether relevant information was passed between the hospital, AWI and police.

After being admitted to the hospital for a five-month stay for cystic fibrosis and treatment for asthma, AWI was quickly targeted by Pueschel, who molested her several times in the ward’s playroom.

“My friend didn’t like going to the playroom either,” AWI said on Tuesday.

“She would often say to me words to the effect, ‘You need to hide when Harry comes in or get sicker so you don’t have to go to the playroom with him.'”

On another occasion AWI was molested by an unnamed hospital volunteer, who left her crying in a cupboard.

The 11-year-old was then accused of stealing a wallet and coat from the same cupboard, and as punishment she was confined to bed and denied a visit from her parents for three days.

“After this incident I wanted to die,” she said.

“One day I tried to cut my wrists in the bedpan room by using the scissors.”

When AWI phoned the hospital administrator’s office in 1984 to report the abuse and her fears Pueschel was still working there, she was told it was illegal to make prank calls.

“You are wasting time and resources of the hospital by making up stories,” she was told by a woman in the administrator’s office.

Now 46 years old and working as a trade consultant, AWI said she has been in and out of medical clinics for depression and panic attack treatments, and has been haunted by thoughts of suicide.

Pueschel’s employment at RCHM was terminated in 1998 after AWI sent an email to then hospital CEO John de Campo, who subsequently informed police.

However Dr de Campo never put the abuse allegations to Pueschel, who has since died.

“The allegation made was substantial, serious and significant enough in my mind to take those actions without interrogating Harry,” Dr de Campo said.

A year later, Pueschel was discovered sneaking back into a ward after lying to staff.

Dr de Campo told the commission he cannot recall holding an investigation into how Pueschel was employed, or whether there were other victims.

He said the hospital failed AWI.

“We have investigations into patients having the wrong dose of Panadol,” Dr de Campo said.

“Looking back, this is, you know, at the extreme end, and why I didn’t do that I don’t know, and I regret that a lot.”

AWI only found out Pueschel was stood down in 2002 after she approached police.

The hearings continue.

AAP eb/rj

Climate change is hitting African farmers the hardest of all

Lahouari Bounoua, NASA

Mitigation efforts could help alleviate the impacts of climate change on food security and agriculture in Africa.


EPA/Herve Gbekide

Climate change is affecting all regions of the globe. But some places, such as Africa, are more vulnerable to climate change’s devastating effects than others. This is particularly true because of the continent’s very high dependency on agriculture.

The Intergovernmental Panel on Climate Change assessed many studies that indicated that temperatures have risen by about 0.5 degrees Celsius over most of the African continent during the last 50-100 years. Minimum temperatures have also risen faster than maximum temperatures.

What this means for rainfall is less clear due to a lack of reliable data. Where rainfall records are available and sufficient to draw a conclusion, they indicate decreases in annual rainfall during the last 100 years over the western and eastern Sahel and along the coastal Mediterranean of north Africa, along with increases over parts of eastern and southern Africa.

How climate change affects agriculture

African economies are heavily dependent on agriculture. The industry employs 65% of Africa’s labour force and accounts for 32% of the continent’s overall GDP.

Agricultural performance has improved since the beginning of the century but the recorded growth is not enough to satisfy demand. In sub-Saharan Africa, agricultural GDP has increased from 2.3% per year in the 1980s to 3.8% per year for the period 2000-05.

This growth, which was mostly a result of an increase in the area of land under cultivation, has since stagnated. Both agricultural land and productivity must increase in Africa to reduce hunger and maintain a sustainable level of food security.

Increases in temperature and rainfall reduction associated with climate change will further reduce agricultural production and increase the demand for more land and water to compensate for climate stresses.

The degree to which climate change impacts agriculture depends on a number of factors. These include crop types, the scale of the operation, the farm’s commercial or subsistence profile, and the amount of natural resources.

How climate change affects food security

Assuring that all people have physical and economic access to sufficient, safe and nutritious food is a formidable challenge. This is not only the case in Africa, but also in other developed nations. The difference lies in the severity of the problem and the proportion of the population it affects.

The impact of climate change on food security will be greatest in African nations. Africa has the largest number of malnourished people, the fewest resources to adapt and the fastest growing population to deal with.

For example, Egypt expects a 15% loss from its wheat production with a two degrees Celsius temperature increase. Morocco’s wheat production will decrease sharply after 2030.

In North Africa, most countries import wheat and are therefore subject to price shocks, and droughts and production losses elsewhere. In sub-Saharan Africa, 95% of the food is grown under rain-fed agriculture. It is therefore extremely vulnerable to adverse climate conditions, projected to reduce rainfall and increase temperatures.

In developed nations, food security alleviated by providing targeted interventions, including direct food aid in the form of food relief, or indirect subsidies. These efforts have been successful in reducing food insecurity in developed nations but have had less success in Africa, which has an insufficient resource base and shorter periods of intervention.

Addressing climate challenges

Climate instability is already causing social unrest in many African countries. People are crossing deserts in Africa and seas to Europe in search of opportunity. The displacement of African people by climate change is an unjust consequence that is falling on those poor and vulnerable people who have contributed the least to climate change.

There must be big actions to match the effects of climate change given the size of the problem it poses. Several African countries are taking drastic action, including the promotion of renewable energy, energy efficiency, improvement of forest and range lands ability to store greenhouse gases, and adopting low carbon transportation modes.

For example, Morocco issued a National Plan against Global Warming in 2009. The plan is based on two pillars: evaluation of vulnerability and adaptation to climate, and mitigation of greenhouse gas emissions. In pursuing the latter, the plan sets out many actions to maintain a low-carbon development policy. It focuses on renewable energy projects – notably a 2000-megawatt solar project in its desert.

Some North African countries, including Egypt, Morocco and Tunisia, have implemented a United Nations Food and Agriculture Organiation initiative on water scarcity to apply new strategies to water resource management. These include water accounting, ranking options for future food supply in terms of costs and water requirements, and analyses that address water management for agriculture.

These large-scale mitigation options, along with education about climate change, could help alleviate the impacts of climate change on food security and agriculture in Africa – but there is still much work to be done.

Lahouari Bounoua does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

Factbox: Impact of El Nino on key crops in Asia and South America

See below for a list of crops most at risk from an El Nino:


Australia’s high-protein wheat crop is likely to take a hit with El Nino expected to bring dry weather across its eastern grain-belt.


Wheat is planted in April-May and the period that makes or breaks the crop is in September. Some rains in recent weeks in parts of the east coast have encouraged farmers to plant the crop.


Although there are abundant stocks of rice in key producers India and Thailand, El Nino is likely to curb the output of Asia’s staple food. This would provide a floor under rice prices that are trading around 12 percent below last year’s peak. A rally in rice has the potential of stoking inflationary fears and unrest in the region. Rice is planted in May-July and requires rains between July and August.


Soybean production would take a hit in India, Asia’s second largest producer of the oilseed, if El Nino brings dry weather to the western and central regions of the country. This could prompt India to import more palm oil and spur further potential gains in prices of the tropical oil. Soybeans are planted in June-July and the crop needs rains in August-September.


El Nino does not immediately hit palm oil supplies as it takes about nine months to a year for oil palm trees to show stress due to drought. But rising demand from top importers India and China as well as concerns over an eventual tightening in supplies due to any crop stress will boost prices. About 90 percent of palm oil, which accounts for 35 percent of global edible oil supply, is produced in Indonesia and Malaysia.


Corn production in China and India is also at risk. Typically, China escapes the brunt of El Nino but corn yields may be curbed as the crop needs relatively higher volumes of water. India could see its crop exports drop, helping U.S. and South American suppliers sell more.