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The Holden moment

In the near term (2014 and 2015) Australia’s economic growth prospects look bright. Low borrowing interest rates are working their magic lifting housing activity and retail spending. The signs of reasonably robust growth in China (close to 8% y-o-y in Q4 2013) also bodes well for growth in Australian export volumes – enhanced by greater capacity to supply on several completed major resource investment projects. A declining Australian dollar could also add to the mix of near-term growth positive factors. However, medium-to-longer term Australian growth prospects are potentially not so good, highlighted by the announcement last week by General Motors that Holden would cease manufacturing in Australia from 2017.

The dent in Australia’s longer term growth prospects comes in only relatively small part from the direct and indirect job losses from the closure the Holden plant. The bigger downside risk to growth prospects comes if the reasons for the Holden decision are not appropriately addressed increasing the likelihood of more Holden-like decisions closing Australian operations of other companies facing pressure – and not necessarily confined to the manufacturing sector – while at the same time reducing the likelihood of businesses making decisions to invest more in areas of endeavour that can potentially thrive in Australia.

One problem Holden faced, alongside many other Australian firms, was the strong Australian dollar. The floating of the Australian dollar thirty years has been recognized by many as one of the most important economic reforms providing a near automatic buffer for the Australian economy against the changing fortunes of the global economy. During the late 1980s and through much of the 1990s when Australia’s export commodity prices were weak, the Australian dollar was weak too helping non-resource industries to prosper. When China started to boom after 2002 driving up sharply Australia’s export commodity prices, the Australian dollar strengthened too. If the currency had not strengthened the economy would have over-heated well ahead of the global financial crisis, inflation would have been much higher and interest rates would have been significantly higher too.

Australia’s passage through the global financial crisis and its aftermath would almost certainly have been defined by sharp recession, much as occurred in the US and Europe. Of course this is cold comfort for the local car industry still facing its own recession, but the message is that the Australian dollar has adjusted in value helping sustain Australian growth over time.

The problem is not so much the Australian dollar (it is depreciating quite steadily at present, just what the doctor ordered) but complacency about the need for other economic reforms that would reduce the pressure on the Australian dollar to do so much adjustment. Looking back, there is now little doubt that the China-led resources boom led Australia to ride up on the income boost for higher resource prices and go easy on economic reforms capable of sustaining growth when the resource investment spending boom fades.

The list of reforms put on hold, or even pushed in to reverse over the past decade is a long one. True labour market flexibility is an imperative to help improve growth and reduce the number of “Holden moments” that lie ahead, but is deemed too difficult politically. Add to the list meaningful tax reform at all levels of government, proper cost-benefit analysis of the list of government infrastructure projects, appropriate government borrowing to fund the projects where the net economic gain (not political gain) is greatest and a thorough –going review of competition policy. This is just the start.

Australia is likely to grow well in 2014 and 2015, but if stronger growth is to be sustained, the opportunity exists now to make haste on all the reforms necessary to allow stronger long-term growth to occur. It seems obvious, except to politicians of all persuasions, because there is always a near-term cost associated with reform. Once the cost is paid reforms keep paying dividends for many years to come. Here is hoping that our politicians find some courage in 2014 for the benefit of all of us and so that the loss of Holden is not in vain.