The boom has turned to gloom for Australia

Press, 11 February 1983, Page 15

The boom has turned to gloom for Australia

KEN COATES has just returned after 10 days in Sydney, during which he studied several aspects of life there today which have a strong bearing on New Zealand and New Zealanders. His first report, published today, deals with the recession which has caught the Australians napping.

How upon row of onearmed poker machines lie idle in clubs and bars all over Australia. In the steel town of Wollongong, unemployment is double the national average.

Somehow there is not the enthusiasm there was for those "Advance Australia" sweaters. T-shirts, skijumpers. sun-shades, and hats, which a year ago were selling at the rate of $24 million annually. It is no wonder that our Aussie mates, who enjoyed boom years until comparatively recently, are not walking quite so tall these days. The world recession has caught up with Australia with a real thump. Its gloom is compounded by a four-year drought that has parched and sizzled the "wide brown land” of the nation’s best-quoted poet, Dorothea MacKellar.

A year ago. the drought was overshadowed as the country rode an optimism heralded as the resource development decade.

There was even talk of Australia,, immensely rich in alternative energy resources, escaping the gloom of the international recession.

What went wrong? The short answer is that Australia. for all its mineral wealth, is a small, ' open economy, heavily dependent on export earnings for its prosperity. It was only a matter of time before Australia became enveloped in the world recession.

That time lag was two years.

Back in late 1979 and early 1980. things looked very different for Australia. This was the time of the second O.P.E.C. oil shock, when the price of oil was doubled.

For most countries this was bad news. For Australia, it was viewed as the big chance. The country has reasonable reserves of indigenous crude oil and exceptionally large alternative sources of energy — uranium, shale oil, coal, and coal-based electricity for aluminium production.

For Western nations, this was the second time the oil price had been jacked up over-night.

Worried about what the oil sheiks would do to the oil price over the next 10 to 20 years, people all over the world concluded that it would just keep on going up. This would naturally pro-

duce a big increase in demand for alternative energy and push up prices of alternatives. Australians, therefore, expected an unending demand for their coal, shale oil. and coalbased electricity.

That was the basis for an expected boom in resources, with wealth for all, and optimism that the 1980 s would be Australia’s decade of development, followed by everlasting prosperity.

The boom was partly mirage, partly reality. There was massive investment in Australian development pro-, jects between 1980 and 1982, but the resource ball did not really get started, and Matilda never did waltz to the new tune.

Problems loomed, both at home and abroad. Overseas, higher prices for Western oil importers meant a transfer of income from the West to the O.P.E.C. countries; it also meant increased inflationary pressure for the West because oil prices affect the prices of so many goods.

The West decided to take the second oil shock on the chin. They would make sure the higher cost of oil was transmitted through their economies as quickly as possible — so people would adjust their attitudes to ac-

cept the fact that oil was now much dearer.

They would also try to stop higher oil prices from becoming built into the wage-price spiral by tightening budgetary and monetary policies.

The world recession was thus deliberately brought about by the people who run the Western economies as the best way to cope with the second oil shock.

What has kept the recession going and made it the worst since the great depression is the effects of the Reagan Administration's policies which gave the United States a tight monetary policy on one hand and a lax budgetary policy on the other. The United States economy has gone deeper into recession. United States interest rates rose steeply, and the dollar appreciated sharply. These factors prolonged the world recession, and the growth in demand for oil began to fall away. There was greater conservation of oil, a switch to alternative energy sources, and greater exploration and development of non-O.P.E.C. oil deposits.

So successful were these measures that combined with the effects of the continuing recession, a world oil glut was produced.

Instead of an inexorable rise in oil prices, the price of oil has fallen. There came a world-wide realisation that the real price of oil might not increase for the rest of the decade. The economics editor of the ‘‘Sydney Morning Herald,” Ross Gittins, says: “Revised expectations about the price of oil, combined with the protracted world recession and high interest rates, have caused a sharp fall-off in overseas interest in resource development in Australia.”

It was an over-reaction by world energy users, followed by a re-assessment. For example, at one stage Ameri-

can aluminium companies were queuing up, fighting each other for the opportunity to start a smelter in Australia. After 18 months, they started to pull out because they had re-done their sums. Observers agree that the Australian Government, in the run-up to the 1980 election, exaggerated the resources boom, which never really got off the ground. In an atmosphere of imminent riches for all Australians, unions demanded their share of the cake before the ingredients had even been mixed.

In March last year, the annual rate of increase of average weekly earnings was running at 17 per cent, with inflation at 12 per cent (it is now 11 per cent). During the initial period of the world recession, Australia experienced reduced demand and lower prices for its exports. Japan, a major trading partner, for example, was not taking nearly as much coking coal for its throttled-back steel mills. But the effects of this falloff were being cushioned by the upsurge of overseas investment in resource development.

While the rest of the world has been tightening its belt, Australia has been continuing to live it up. The New Zealander, • Murray Boyte, general manager for Marac Australia, Ltd, says: “This country has had it so good in the last 10 years. The standard of living, and quality of life in terms of material things, is so high in Australia.

“The ordinary person has a good wage, a good house, a car, good holidays, not far to go to the beach, and a lot of leisure activities.”

With full employment and plenty of jobs, no abnormally long hours and good pay, productivity became low, Boyte says. Management was also sometimes sluggish regarding change, because times were so good. In the light of the crunch

that has come, how real is opposition to Prime Minister Malcolm Fraser's wage freeze, one of the issues on which he will fight his snap election?

"Everyone knows they cannot expect big pay rises now, that their highest priority is not what wage increases they can get, but to ensure they hang on to their jobs,” Ross Gittins says. He also says that at a time when there was no wage pressure, and when people were calling on the Government to do something, the Government decided to make a natural freeze official.

“Here was something it could do and appear to be doing successfully, and gain political mileage from." There is a widespread scepticism that whatever government is returned next month will be able to pull Australia out of the recession.

Australia’s economic health is so closely linked with the outside world that anything governments can do is only marginal, say observers.

“It is absurd to think we could reduce our dependence on the world economy without reducing living standards even further by the way New Zealand has through ab-

surdly high protectionism." says Paedric McGuinness, editor-in-chief of the influential "Australian Financial Review."

Governments can help ease unemployment, he adds, though there are limits to job creation.

He praises Mr Fraser's political instinct and sense of timing over the wage freeze, but is cynical about the Prime Minister's announced sAust64o million water resources development programme.

"He has decided to appeal to a big vision, to create a concept of national pride and unity which will help overcome the recession. In that case he is having himself on. "This grandiose programme includes diverting rivers, making them run backwards, uphill, building dams everywhere. It's like the old witticism: there’s an election coming up; I can feel a dam coming on.”

Although cynics are saying that droughts are a great alibi for governments, the great continuing dry, the worst in 100 years, is enormously significant.

"The rural sector is suffering much more badly than it would normally, even in a world recession,” McGuiness says. “It has emphasised the fact that not only is there a falling per capita income now, but a falling absolute income.”

There is even talk of importing wheat for feed grain, an unheard-of measure in Australia. To add to their, worries, Australian sheep farmers believe they are being threatened by a flood of what they see as subsidised lamb from New Zealand on to the world market.

Since the recession hit, unemployment has continued to rise. Factory production is down, with falls in the steel, building material, carpet, chemical, and vehicle industries.

Unions are blaming the Federal Government’s failure to protect industry from foreign imports for falling job and production figures. The president of the Australian Council of Trade Unions. Mr Cliff Dolan, says prices have risen by 9.1 per cent since the last general wage increase. This, he adds,

represents a loss of purchasing power of $25 for a worker earning $3OO.

The- A.C.T.U. has resolved to campaign against the wage freeze, but observers discern no real heart for an industrial confrontation that would cripple industry and place more jobs in jeopardy.

There is widespread agreement that things will get worse before they get better. Murray Boyte sees 1983 being an extremely difficult year for Australia.

To meet any upturn in the international marketplace, there will be a need to reequip. develop, and increase cash flow, he says. That will not happen unless there are increased returns and higher prices abroad.

One problem is that the work-force is getting larger all the time. The economy needs to grow about 2 per cent a year just to keep up with the natural increase. But Boyte typifies the Australian attitude to the future: “We are not approaching the end of the world. It is just another recession which happens to be the worst since the Great Depression. But it has a finite life. “I am unable to predict how long it will be, but one thing I damned well know is that we will pull out of it —

There might be a slow recovery in the latter half of this year, but Boyte does not see a marked improvement until 1984.

Ross Gittins is pessimistic about unemployment which, he says, will worsen. In the future, the economy will grow at a fairly slow rate. This means that unemployment will Continue to grow for two or three years before it starts to fall — slowly.

if not in 12 months time, then in 18 months or two years, up we will go." Mr McGuinness is not so buoyantly optimistic: "Australia is not an economy that can go it alone, because it is not big enough. “We are dependent on the United States and Japan. The Japanese are starting negotiations on new coal delivery and price contracts. Because their steel industry is in trouble we will be selling less at a lower price. “The American economy is still showing no real signs of

recovery and the chance of Australia benefitting from a world economic recovery based on American stimulus in the near future is very small. "There has been some pick-up in world commodity markets, but it is not strong. And if O.P.E.C. should really collapse we could have ah international financial crisis as well. It could be a nasty year. "I don’t see any recovery this year — with a bit of luck things could start looking up in 1984."