Australia’s three-way squeeze – a booming population, rising dollar and climate change: Kohler

Three momentous changes will make 2010 another turning point in Australian history: the Aussie dollar at parity, the preparation for emissions trading to start in 2011 and surging population.

Each of these things, on its own, will produce fundamental change in our economy and society, and in some cases is already doing so. Together they will cause a massive shift over the next decade away from export industries and towards domestic ones – specifically construction and retailing.

The only one of them that remains negotiable or uncertain is the response to climate change.

Yesterday’s meeting of the coalition party room took us one small step closer to the passage of the Rudd Government’s ETS legislation, although the Liberals and Nationals remain in an agony of wedge politics orchestrated by the ALP, and the Greens remain implacably opposed.

Whether an ETS is the best way to reduce carbon emissions is now irrelevant – the endorsement of emissions trading around the world is universal, so that’s what it’s going to be.

The Australian Government has proposed an ETS that makes almost no difference to high emissions intensity industries, including coal-fired power generation, and the opposition is trying to remove the word “almost”.

Nevertheless, if Australia signs up to a greenhouse gas reduction target at Copenhagen in December an ETS will have to be passed into law, whether Malcolm Turnbull has negotiated a deal with the government by then or not.

There is plenty of gloom at present about the prospects for agreement at Copenhagen, with another failure last week in Bangkok at the second last negotiating session before the big one starting December 7, but it is hard to imagine nothing at all replacing the Kyoto Protocols so the most likely outcome is some kind of ETS.

Meanwhile the Australian dollar is already about 50% above the long-term average exchange rate that, in combination with enterprise bargaining, produced the rebirth of Australia’s export industries over the past two decades.

And as Robert Gottliebsen pointed out last week, the currency is heading even higher because of our links to the growth regions of Asia, rising Australian interest rates and the falling US dollar.

These things will almost certainly combine to send the Aussie to parity with the US dollar and beyond.

The changes this will force on Australian industry will be immense. Export industries will come under sustained cost pressures similar to those that newspaper publishers are experiencing; retailing will boom as imported goods fall in price.

Finally, Australia’s population is growing at its fastest rate in four decades, thanks largely to the fact that net migration, at 280,000, is triple the long-term average and almost double natural population growth. (Which makes the current political heat around border protection and refugees somewhat ironic, by the way.)

A population boom like this will lead to stronger economic growth, all else being equal (more goods and services have to be produced, therefore higher GDP).

Normally it would also lead to a construction boom, but so far it is only leading to higher house prices because of limits on the supply of new homes.

Unless this population surge is just a spike, which looks unlikely, it will lead to even higher house prices, a construction boom and more retail spending.

This, at a time when consumption is already being boosted by the high Australian dollar.

Against that, many export industries will be in a state of distress because of the currency and emissions trading legislation – especially if competitors in Asia get a free ride out of Copenhagen.

Each of these forces – rising currency, surging population, emissions trading – is now upon us: they are no longer potential changes to the Australian economy, but certain ones (with the possible exception of emissions trading, depending on agreement in Copenhagen). We’d better get used to them.

This article first appeared on Business Spectator.