Avoiding a “hard landing” off China means asking hard questions around productivity

In Perth last October, New York University’s Professor Nouriel Roubini issued a dire warning to the business forum of the Commonwealth Heads of Government meeting that Australia faced the threat of a “hard landing” in China and the growing risk of being hit by a double-dip global recession.

If this scenario is to eventuate in the future, it is prudent to assess the changes emerging in our own national landscape, before we turn our attention to China. The question we really need to ask is – are we an agile and resilient country to deal with such a scenario?

The Treasury’s Intergenerational Report of 2010 is a good starting point to consider this answer. The IGR neatly extrapolates Australia’s economic conditions to 2050 underpinned by the popular 3Ps framework – Population, Participation, Productivity.

Let’s take a minute to cast our eye over some of these forecasts:

Source: IGR 2010

The anomaly here is the IGR forecasts, which assumes a higher productivity performance of 1.6% – a technical assumption based on Australia’s productivity rates of the 1980s.

It is unclear as to why the 1980s is taken as reference point – perhaps because the 1990s was considered to be an era where technology development and infrastructure development helped boost Australia’s growth trajectory (productivity growth rates of over 2%) similar to many other western economies. This tapered off in the early-mid 2000s and has since dropped off.

The downtrend in productivity levels has also been offset by the increase in the terms of trade driven by demand for Australian resources to boost growth in China and India. The Australian government’s Treasury modelling indicates that the higher terms of trade will start to decline by about 20% over the next 15 years which will still be high but it will start to negatively influence living standards.

The data from the Australian Bureau of Statistics (ABS) shows that in 2010-11 the major detractor from growth – that is, 2.1% – was a result of the 10.4% increase in imports of goods and services.

What is interesting about this is that goods vehicles and passenger motor vehicle were the leading two imports in 2009-10, with growth rates of over 35%. It is no surprise then why the auto and manufacturing industries are hurting in Australia.

Historically high terms of trade will taper off.

Is this a trend that will exacerbate with an ageing population and a society that is not more interested in creating its own products? Is it easier to just keep importing goods and services? Now, whether this is a result of a stronger Australian dollar or an emerging trend in the way our society is beginning to function, is up for discussion.

The McKinsey Global Institute at the International Risk Assessment and Horizon Scanning Symposium 2011 in Singapore identified that for the US to add $1 of GDP growth in the 1980s required 70% of its productivity performance to be capital and resources intensive with the remaining obtained from labour utilisation.

This has since reversed. In 2010, 80% of every $1 GDP growth is driven from labour utilisation and labour productivity.

In Japan, the ageing population exacerbates these productivity growth rates resulting in a need for much higher labour productivity growth rates.

Increasing our productivity with an ageing population will be a challenge.

But let’s leave the data and numbers aside for now and triangulate what all of this means for Australia’s future.

The data indicates what we are likely to experience in the years to come – declines in population growth, workforce participation rates and average hours worked, along with higher expenses in the health sector, possibly higher imports of goods and services and a possible downtrend in our living standards.

To avoid this emerging pattern, a relatively higher productivity growth rate has to be achieved, which means we may have to work longer and we definitely have to change the way we conduct our business. Both are uphill tasks for an ageing society.

As Andrew Sharpe in 2005 stated in his testimony to the Senate Standing Committee on Banking, Trade and Commerce:

“At 1% productivity growth, living standards double in 70 years. If we can raise productivity growth to 3%, we can double living standards in 24 years. If we can attain 2% productivity growth over the next 30 years, financial problems related to ageing in terms of the cost of health care and pensions will largely evaporate.”

It is therefore vital for productivity reforms to be put in place now if Australia is to address this long-term problem.

Most of us know that boosting productivity can be achieved through macroeconomic stability and microeconomic reform. Offering businesses greater flexibility, infrastructure investment, improvement in products and services, creating a highly educated and well-trained workforce are all avenues that will result in productivity benefits.

There are various initiatives in train that also need to come to fruition – National Broadband Network (NBN), the billion-dollar investment in skills and education reform, the capital and resource investments in the resources sector coming to fruition and all such activity.

It’s not difficult to fathom where the root of our future growth must come from – innovation and entrepreneurship. This is not about getting people to work more hours to produce more output. The mantra and focus must be on “working smarter”. It is time that this rhetoric is followed up with action.

It’s about changing the way we do things. We need to lead by embracing and trialling new thinking, changing the way decisions are made (or not made) within organisations – public and private, leading from the front and planning now about what Australia’s place in the world must be, what are we going to be known for and what industries will carry us into the future.

Creating a highly educated and well-trained workforce will result in productivity benefits.

Given the magnitude of the problem that has been showcased here, these are not choices anymore. With an ageing population and an increasing burden placed on government services especially in the health and aged care sectors will result in the country’s net debt increasing from 11% in 2010, as outlined by the OECD’s Central Government Debt report, to 20% of GDP from 2040 onwards. Thus, the need to display some forward thinking is now.

What the IGR does well is provide a forecast. The IGR does not discuss the change in geopolitical or geostrategic changes and how that could impact our nation. We need to back cast to test our current policy and organisational settings to ascertain how well the nation is equipped to deal with such future challenges.

This gap in IGR modelling can be enhanced and made more robust through the generation of multiple future scenarios – case in point, the “hard landing of China.” What does this actually mean for Australia? What does it mean for our industries? How many of these industries may experience a sudden downturn and which ones will carry us through? What happens to the strength of our resources sector and resilience of our economy should demand fall?

Which sectors of the economy should we bolster now, to be ready for a change in the future? Can Australia boost domestic consumption like India to stabilise the economy in the event of a double-dip recession?

These are scenarios that need to be planned for, not as a prediction but as descriptions of an uncertain future. Isn’t that the place where we’ll be spending most of our time – in the future? These are issues worth deliberating and in the light of the complexity and interdependencies of economies, it is important for us to pay attention to visioning Australia’s future.

This article first appeared on The Conversation.