Today, some of the most advanced economies in the world, where citizens enjoy the highest living standards available, are also considered the most moribund. Japan’s economy has been backsliding for decades. The United States is running purely on the fumes of Donald Trump’s enormous tax cuts.
Australia, too, appears finally to have joined the “go slow” club.
Our rate of annual economic growth, having consistently oscillated around 4 per cent during the 1990s, has had a 2 in front of it for much of this decade.
We were protected, for a time, by two distinct booms over the past decade. First, even after the global financial crisis hit, we continued to ride a once-in-a-lifetime mining boom, fuelled by China’s rapid development. But China’s rise up the economic ladder has seen it slow too.
Second, we surfed a huge wave of debt, as we binged on record-low interest rates to build homes and pack them with consumer goods.
Australia’s property market has now turned. It’s looking like a long, slow grind to pay down our world-beating debts, and without the sort of income growth we’re used to.
So, does this all portend doom? Is our world-beating run of economic growth about to go bust? Or have we simply shifted down a gear, successfully locking in the higher living standards achieved over the past few decades, but unlikely to enjoy the same growth in the near future?
I think it’s the latter.
It seems like the Reserve Bank does too.
In his statement accompanying this week’s decision to leave interest rates on hold, governor Philip Lowe acknowledged the reality that the global economic outlook was “reasonable”, at best, and that the recovery in Australian wages was likely to be only “gradual”.
But instead of attempting to jump-start the economy again, the message we got from the central bank – for now at least – seems to be: Get used to it.
It’s time to take our lumps.
It’s always been a myth that the Reserve Bank can pull economic growth out of its hat. In reality, the central bank can’t create growth, only time-shift it, to help smooth the economic cycle.
Simply keeping the cost of borrowing permanently low is no cheap route to permanently faster growth or longed-for wage rises.
In this new era of slower growth, the policy challenge is far more complicated than that.
Ultimately, the total value of our economic output is determined by three factors: population growth, participation rates and productivity growth.
Population growth is the simplest way to generate growth, but few people think it’s the best, particularly if output per person is falling.
Getting more Australians to participate in productive activities is another way we can grow. But it is ultimately productivity growth that determines our fortunes in the long run.
Sustainable growth can only come from the hard slog of individuals coming together to make wise investments and do clever things. Which they do tend to do.
Humans, as it turns out, are a bit like iPhones: we improve with each generation. We get smarter. We invariably find new ways to combine the same set of inputs to produce greater value outputs.
In the end, it is these long-run improvements in our collective knowledge and know-how that will drive future growth. There is no job more important for governments than the role they play in fostering this sort of growth through quality education systems and other strategic investments in skills and human capital accumulation.
Governments, of course, need to also constantly make sure they’re not unnecessarily getting in the way, with poorly designed taxes or red tape. They must make sure markets are designed well, to correct inherent failures and to enable individuals to flourish.
And then they need to get on with their broader job of making life better for people, by providing quality services. It is against these yardsticks that Australia’s political parties should be judged at this election.
The good news is Australia remains an advanced nation with world-beating living standards. Rest assured, on average, our economy will continue to grow. It’s what economies do.
But if you’ve noticed a subtle shift in the pace, you’re not imagining it.
Our recent routes to higher living standards, of simply getting foreigners to pay more for our stuff, or borrowing more to buy stuff, are at an end. That’s OK; they weren’t really sustainable.
What emerges next is unlikely to match the sugar rushes of previous years. But, with some care, our paths to growth will be more sustainable.
In the meantime, our economy is taking a bit of a breather.
And that’s OK. We all need to do it, now and again.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.