Official figures, showing that Australia’s trade deficit last December blew out to $2.7 billion – the second highest figure on record – sent warning signs that Australia’s foreign debt is rising to unsustainable levels.
Australia’s net foreign debt, now $422 billion, is rising at a rate between $50 and $60 billion a year. Interestingly, despite claims that the US-Australia Free Trade Agreement would increase Australian exports to the US, in fact, Australia’s biggest merchandise deficit continues to be with the United States. It amounted to $6.9 billion in the seven months to the end of January.
The worrying trade figures were released only days after the Federal Government’s senior economic adviser, Dr Ken Henry, gave a speech indicating he feared that the US economy could crash under the weight of its massive public and private sector debts, pulling Australia and the rest of the world with it.
The Prime Minister, Mr Howard, was quick to distance himself from Dr Henry’s remarks, saying “there is no prospect of the American economy crashing.”
Dr Henry is not an alarmist. In fact, he is a supporter of economic and industry deregulation, and a trenchant critic of what he describes as “rent-seeking”, i.e. policies which support Australian industry, whether primary or secondary. Further, he is a specialist in international economic policy.
He told the Asian treasurers, “Serious observers have been arguing since the late 1990s, when the US current account deficit was much smaller than it is now, that the deficit was unsustainable and would come undone in a couple of years. It hasn’t. We obviously can’t predict these things well.”
He said, “What we are seeing, with the cheap debt financing of the US current account deficit, is worryingly reminiscent of Fed Chairman Greenspan’s warning in 1996 of irrational exuberance in US stocks.
“The rise in [US] stock prices might have had much further to run but it still was a bubble. It burst eventually. Is something similar happening now to bond prices?”
Dr Henry added, “Whatever happens, the greater the build-up in structural imbalances, the greater is the risk of a large and sudden adjustment to the US economy, global capital and currency markets; and the more likely an adverse shock to all of our economies.”
His comments followed similar warnings by the head of the International Monetary Fund (IMF).
In an address given in New York on February 23, the IMF managing director, Rodrigo de Rato, said urgent combined international action was required to head off the possibility of a financial collapse.
He said the main cause of concern is the US trade deficit, currently running at about $US600 billion and the budget deficit of about $US430 billion for 2005.
US imports are almost 50 per cent greater than the country’s exports, with the deficit being financed by international central banks and funds managers.
“There can be little doubt that the pattern of persistent and growing US current account deficits, and the increase in dollar indebtedness that they entail, have contributed to the recent renewed depreciation of the dollar,” he said.
Over the past three years, the US dollar has fallen 50 per cent against the Euro. Despite the growth of the US deficit, money continues to pour into the US from Asia and Europe. The unresolved questions are: for how long will it last? And where does all this leave Australia?
Australia’s vulnerability arises, in part, from its lack of a comprehensive industry policy, unlike all its trading partners – including genuinely free-market economies such as Taiwan and Singapore – which vigorously support the development of local industries.
The consequence of 30 years of economic rationalism has been the steady decline in Australia’s manufacturing and agricultural industries, turning Australia into little more than a quarry which supplies raw materials to the rest of the industrialised world.
Almost all the high-technology manufactured goods in Australia – from computers to cars to mobile phones – are imported, as is a surprising amount of lower-level manufactures. Australia’s growth industries are in the service sector, such as education, hospitality and tourism.
The tools which Australian governments have chosen to deal with the chronic imbalance in the economy are limited to control over interest rates, set by the Reserve Bank, and further deregulation of the economy.
Because there has been no industry policy, the limited number of manufacturers in Australia are experiencing serious shortages of skilled labour, putting pressure on wages and creating the danger of a wage break-out in the economy.
If this were to happen, it would lead to renewed inflationary pressures, which would be restrained by higher interest rates. To prevent this, the Federal Government is pushing for further deregulation of the wages system, to hold wages down.
Surely there is a better way.
- Peter Westmore is president of the National Civic Council