For Australia's economy, the past decade sealed the decoupling from US woes and cemented the integration into Asia.
Both ends of the noughties decade were bookended by symbols of the decoupling. At the start, the US dipped into recession when the dot-com bubble burst. Near the end, the US suffered its worst crash in nearly 80 years. Both times, Australia's economy sailed on without dipping into the red.
Important links remain, but the lockstep is severed. The history of much of the 20th century was that Australia always followed the rest of the West by catching cold when the US sneezed. In the 21st century, goodbye to all that. Hello, Asia. This is now Canberra's established reality.
The new standard story should not disguise the rapidity of the journey. If this was a geomorphic rather than an economic phenomenon, it would be marked by earthquakes, the parting of continents and the rise of new mountain ranges. Geological eons translate into economic decades.
Earlier in the decade, Treasury embraced purchasing power parity (PPP) as a useful tool to help Canberra understand how quickly the tectonic plates were shifting. In the 2006 budget, Treasury used PPP to re-arrange the map of Asia, awarding the number two economic spot to China over Japan while India took fourth place. Next Tuesday's budget will offer further markers delineating the US decoupling and the deepening reality of the Asia embrace. The trend line is so clear that it has become the setting as much as the detail in the Treasury narrative. Last year, for instance, Treasury gloried in the best terms of trade in a century while musing on how the Asia's voracious appetite for resources will change the internal workings of the Australian economy.
Ahead of the federal budget, the IMF has depicted the shifting of the continents for Australia over the last 20 years. In the 1990s, the US could still kick around the Oz economy. But the decoupling completed in the noughties means the US negative effect is 'no longer statistically significant'. Asia is what matters, for good or ill. Here is the IMF on the twenty-year transformation:
During the last decade, shocks from emerging Asia have overtaken those from the United States as the most important external factor influencing Australia’s business cycle. For the sample period 1991–2010, a 1 percent shock to US GDP is found to move Australian growth by about 0.4 percent. In contrast, GDP shocks from emerging Asia have an almost negligible impact on Australian growth. This result changes dramatically when limiting the sample period to 2000–10, for which a 1 percent shock to emerging Asia’s growth is found to shift Australian growth by ⅓ percent, whereas the impact of US GDP shocks on Australia is no longer statistically significant.
(Definition of emerging Asia: East Asia plus India, minus Japan.)
The noughties witnessed fast-growing trade integration between emerging Asia and Australia. In 2010, almost 60% of Australia's exports — dominated by commodities — headed to emerging Asia, compared with 40% ten years ago. At the same time, about half of Australia's imports came from emerging Asia, up from one-third a decade ago.
New Zealand is following the Australian trend, although Asian shocks will reach the Kiwis via the Oz business cycle rather than directly. Shocks from Australia are injected into the Kiwi system by 'financial variables, as the financial system of New Zealand is dominated by four subsidiaries of Australian parent banks'.
The IMF judges that the long-term trend of continued strong growth in emerging Asia bodes well for Australia. The benefits to Oz will flow through trade integration and more wins in the terms of trade. The Fund's modeling finds that the new decade could be just as much fun as the noughties:
The simulation suggests that, should emerging Asia continue to grow notably faster than the world average, the impact on Australia will be even larger than in the past. This larger impact reflects both the increase in emerging Asia’s economic size and Australia’s growing integration with emerging Asia. Over the next 10 years, the model suggests that a 50 percent increase in emerging Asia’s real GDP, driven by tradable sector productivity growth, would raise Australian GDP by about 20 percent. However, should emerging Asia’s economic growth become more balanced, with productivity growth in both tradable and nontradable sectors contributing equally, the growth dividend is roughly cut in half, owing to more modest improvements in the terms of trade of Australia.
Next week's federal budget for 2011-12 is framed by the pledge to get the budget back into surplus in 2012-13. The broader question beyond that budget turnaround is whether Australia has the discipline and vision to handle good times as well as it has dealt with past adversity. And prepare for the day that must eventually come when being coupled to Asia means toppling over the economic edge, not climbing to the uplands.
Photo by Flickr user Mark Sardella.