Australia’s economy is ill-prepared to deal with another shock, and if China slowed considerably it would fail to avoid a recession, a former Treasury official has warned.
Chris Richardson, from Deloitte Access Economics, says compared with Australia’s economic position heading into the global financial crisis, the official interest rate is already at a record low (1.5%), the dollar is already near its long-term average, the commonwealth budget is already billions of dollars in deficit, and household debt is already the second-highest in the world relative to incomes thanks to house prices hitting “dangerously dumb” levels.
It means future stimulus spending would be far costlier for Australia’s governments, and much harder to pursue, he says.
Richardson will use a speech to the National Press Club on Wednesday to caution that Australia’s leaders ought to be aware of such a scenario because it is one of a number of potential scenarios looming large.
But he will also warn that governments and businesses have become so uncertain and fearful of the future their conservatism is risking making future generations less well off.
He will say Deloitte’s surveys of business leaders have found four out of five believe uncertainty is getting worse, and this needs to change.
He has modelled a number of scenarios for Australia’s economic future to make it easier for Australia’s leaders to understand what may happen to the economy under certain conditions. This should help them become less fearful of the future, he says.
“We don’t have to be as scared of the future, we just need to be better prepared for it,” he says in notes seen by Guardian Australia. “You can fight uncertainty with better information, and once you look closely at a different future, it rapidly become less scary.”
Richardson has modelled three scenarios that he believes are plausible: a downturn in China’s economy which sends Australia into recession; Asian economies perform better than expected while Australia’s government has the courage to reform; and Australia gets better at being “cyber smart”.
He says these scenarios are not the same as Deloitte’s formal “most likely” forecasts, which are produced quarterly. But the “most likely” view of the future is far from a done deal, he says, which is why we also need to think about plausible outcomes.
In the scenario where Asian economies perform better than expected, Richardson says more than $800bn could be added to Australia’s national income over the next two decades, with wages lifting almost 2% more than prices, and employment rising by 1.5 percentage points.
He predicts the boost in profits, and economic prospects, would encourage business to invest more, lifting business investment by 6 percentage points.
“But that success would come with some costs attached, including a stronger Australia dollar and slightly higher interest rates,” he says.
“The next two decades won’t simply see China’s middle class get richer and buy more holidays in Australia, and less iron ore. It will also see the third and final wave of growth out of Asia hits its stride, with the rise of India, Indonesia, Vietnam and the Philippines.”
Richardson says his “key message” is that we shouldn’t let ourselves be scared of the future and cling to playing it safe.
“I arrived in Canberra in the early 1980s, at exactly the time that some politicians, public servants and journalists realised that Australia could do better than it was doing. Between them, they convinced the electorate of the need for change, that some Plan Bs were much better than the status quo.
“The result is ultimately today’s Australia: much more successful, much better off, and about to pass the Dutch for a world record of growth.
“And yet we seemingly struggle to do the simple things in this town these days. So again I’d say that thinking about alternative futures … is a way to help grind down the gridlock that’s gripped out national political process.”
