A Two Speed Economy - What does it mean?

Before the GDP figures for the March 2011 quarter were released, we spoke with a range of clients, business owners, bankers and professionals, and the message was consistent: things are tough.

Across industries, cashflow and trading conditions remain tight. The housing sector, typically a driver of consumer confidence and discretionary spending, is under strain. Property prices have either flattened or fallen depending on the data source, with reported drops of 0.2% to 1.2% in Sydney and even greater falls in Perth and the Sunshine Coast. Meanwhile, growth in bank home lending is at its lowest point in a decade.

A High Dollar That Hurts

The high Australian dollar continues to drag on the broader economy. Exporters, especially in sectors like manufacturing, education, tourism, wine and agriculture, have seen their margins squeezed and competitiveness eroded. Unlike these industries, mining has remained insulated due to record commodity prices.

The mining sector’s strength, however, may be part of the problem. The Australian Bureau of Statistics (ABS) has partly attributed the recent GDP contraction to the Queensland and Victorian floods, but the mood among businesses in unaffected regions like Sydney has long been cautious.

Are There Any Economic Lifelines?

Despite the challenges, Australia is not out of options.

• Interest Rates: Unlike the US or Japan where interest rates sit at zero, the Reserve Bank of Australia (RBA) still has room to cut rates if economic growth continues to stall. However, the RBA is cautious due to concerns about reigniting housing speculation and inflation.

• Government Stimulus: Australia still has borrowing capacity to fund targeted stimulus. Ideally, spending should focus on long-term infrastructure projects to improve national productivity. However, these projects tend to favour large firms, with benefits taking time to filter down.

• Localised Programs: Broader programs like the Building the Education Revolution (BER) helped maintain employment during the GFC. Although criticised for waste, such programs had the advantage of quickly injecting cash into local economies.

The Risk of a Two-Speed Economy

We are witnessing the risks of a two-speed economy. Mining is booming, requiring skilled labour, capital and infrastructure, while other sectors lag. Skills Australia recently projected that 2.4 million additional skilled workers will be needed to meet future demand in mining and related industries. But how do we get them?

There’s a concern that these workers will only become available if other sectors contract, potentially forced out of business by rising interest rates and limited access to labour.

Key Pressures on Australian Businesses

Right now, many Australian businesses are feeling the squeeze due to:

• The threat of rising interest rates, which can stifle consumer demand and investment

• A high Australian dollar, undermining international competitiveness

• The impact of the internet, particularly on retail, which brings both disruption and opportunity

Final Thoughts

Australia is not heading for disaster, but it is at a crossroads. With smart policy and targeted intervention, we may be able to rebalance our economy. But if we leave it to run on autopilot, we risk driving one sector forward while dragging the rest into reverse.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.