Australia's two-speed economy threatens to hurt growth

Australian Prime Minister Julia Gillard gives thumbs up to the mining industry while university student walks around with a sign saying 'Employ Me' in Sydney
Image caption While its mining sector is witnessing a boom, other parts of Australia's economy are facing tough times

Australia's bipolar, twin-speed economy now has a pithy tagline: this has become a "boom and gloom" nation.

It was the invention not of a journalist, but of a leading business lobbyist with a close grasp of the balance-sheet realities for companies in the manufacturing, retail, education and tourism sectors.

For Heather Ridout, the chief executive of the Australian Industry Group, the divide is easily identified: it is between the resources sector and the rest.

"Some sectors are booming while others, which are very interest rate-sensitive and sensitive to a high dollar, are really doing it tough," she says.

The world has watched admirably at the "wonder from down under," a seemingly recession-proof economy that avoided a downturn after the global financial crisis and that has not experienced two successive quarters of negative growth for20 years.

However, the prosperity and economic activity seen in the mining fields of Western Australia and northern Queensland - the so-called quarry of the world - has not spread across this vast continent.

"The mining industry employs about 150,000 on a good day, while those supplying it add another 300,000 or 400,000," says Ms Ridout.

"The bulk of Australians are in the industries that are feeling it tougher, and in the gloomy part."

Boom Australia, which is centred on the resources sector, is contributing to the country's best terms of trade in 140 years.

Metal ores and coal account for 40% of the country's export receipts.

Significantly, exports to Asia now account for 60% of the overall total.

As Treasurer Wayne Swan noted in a statement to parliament on the economic health of the nation: "For the first time in our history, we are located in the right part of the world at the right time, continuing to benefit as we are from the thriving economies of Asia."

The envy of European finance ministers, public debt is also very low.

At the same time, Australia is going to witness an investment binge in the resources sector.

Once derided as the Pacific Peso, the Australian dollar has also been at historic highs against the US dollar, which is seen as totemic of the country's economic strength and resilience.

Blunder down under?

Gloom Australia is to be found in the country's shopping malls, factories and tourist resorts.

Those parts of the economy are witnessing a spending strike from cautious consumers, low business confidence and a reduction in visitor numbers.

Image caption Low consumer confidence and a jump in unemployment has hurt Australia's retail sector

In July, unemployment climbed to 5.1%, an unexpected rise.

Since that figure was released last week, Qantas and OneSteel, the country's largest steel manufacturer, have between them announced 1,400 more job cuts.

Bluescope steel has also announced that it will close two of its production facilities and cut 1,000 jobs.

A survey of small businesses by the Australian Chamber of Commerce and Industry found that the outlook was gloomier than at any time in the past two-and-a-half years.

Sales were declining but costs were increasing, the survey found, cutting into margins and hitting profitability.

Deeply indebted, householders are trying to pay off their credit cards and mortgages.

In a country where spending has outpaced income for the past decade, the household savings rates has gone up to 11.5%.

Policy dilemma

The Reserve Bank of Australia, then, faces a hard choice.

Its impulse is to increase interest rates in order to curb inflationary pressures. It is known to have a tightening bias.

But it is worried about the debt crises in the eurozone and the US, and their impact on Australia's growth.

The high dollar has helped in keeping down prices, which partly explain why the Reserve Bank has left interest rates on hold since November. But the bank is under pressure from retailers and industry not to increase rates.

"It is a very difficult economy to manage," says Australia Industry Group's Ms Ridout.

"The orthodox view from the Reserve Bank of Australia and from the treasury is that a lot of our sectors simply have to make room for a boom that's going to occur in northern Queensland and north-western Australia.

"And the rest of Australia, who are sitting at the sharp end of this, are saying 'Well, what's going on?' Finally, the penny is dropping."

Her fear is that the Reserve Bank will act with Boom Australia in mind rather than Gloom Australia.

"We could end up going through a structural process where we trash a lot of very, very important industries in Australia," she says.

"In the 1990s, when Australia was called the miracle economy, it was off the back of education, off manufacturing and tourism exporting their hearts out which was the big driver of economic growth. And now those industries are right in the headlines."

Image caption There are concerns that too much emphasis on the mining boom may hurt other sectors of the economy

For Gloom Australia, the outlook is not that good. Some 20,000 manufacturing jobs have gone this year, and the Australian Industry Group claims that the modelling underpinning the carbon tax suggests that 200,000 jobs will go over the next 10 years. "This is tough," she says.

The fact that Australia has a minority government has not helped either. Retailers report that consumers stopped spending during last year's federal election, and have been cautious ever since.

"I think the election campaign hasn't stopped. We're in a minority government, we haven't seen that for decades," Ms Ridout adds.

Dutch disease?

Then there is the broader, more structural question of whether Australia is in danger of succumbing to the Dutch disease, a phrase coined by The Economist in the early 70s which described the decline of Dutch manufacturing in the wake of the discovery of a large natural gas field in the 1950s.

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Media captionThe BBC's Nick Bryant reports on how the buoyant resources industry could be masking problems in other parts of the economy.

Unquestionably, the mining boom has made Australian economically complacent, and reduced the need to adequately invest in higher education, trade apprenticeships and research and development.

Right now, Australia's national prosperity is based on digging things up rather than being inventive, creative or ingenious.

And crucially, its own economic strength is increasingly dependent on China's inexorable rise, which makes it vulnerable to shocks.

Australia is probably better placed, both economically and geographically, than any other advanced country. And while the Reserve Bank may pair back its growth estimate, it is still expected to be around 3%. But, again, those growth figures will be fuelled by the export of resources.

"It could get very tough," concludes Heather Ridout. "But the fundamentals here are quite solid and position us to deal with it. But nobody should kid themselves that this is all going to be easy."

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