Not long ago, the former Prime Minister of Australia, Kevin Rudd warned that Australia is facing a demographic crunch, which if not solved, will have grave implications on the Australian economy in the long-term. To put it simply, everything else being equal, Australians are getting older and older, which means that the Australian economy will not be able to continue increasing its production of goods and services. That means that the economic growth will slow, stagnate and eventually turn negative. On top of that, the Australian economy seems to have a problem with ?skills shortage,? which is threatening future economic growth (see Skills shortages shaping up as risk to economy).
Given that the Australian economy (as in most other modern economy) is a debt-based one, any slowing of growth will result in deflation, which is a complete show-stopping outcome (see Why is the modern economy so dependent on ever-lasting growth?).This demographic situation that Japan is already facing right now, and as we wrote in Currency crisis: UK, Japan and US, will be the first developed nation to face the consequences of the demographic time-bomb.
The easy solution is to increase the immigration intake, in order to fill the ranks of tax-payers, skilled workers and consumers so that the ?bicycle? economy can continue to stand (a bicycle has to move continuously in order to stop toppling).
Unfortunately, the idea of further population growth is an extremely unpopular among the electorate. Complaints, gripes and dissatisfactions related to the population issue (e.g. too much time in traffic jams, commuters crammed like sardines into trains and buses, poor-quality housing, rising power prices and climate-induced water shortages) are making the electorate fed-up. With the Federal election looming, no politician will want to be seen to support the idea of further population growth.
So, who is to blame for this? Since Australia is one of the least densely populated nations in the world, Australia should not be overcrowded in theory. But what happened?
The easiest target to place the blame on is the government, both on the Federal and State level. There is a chronic lack of investments in infrastructure, health, education, basic services and urban planning. Their symptoms include overcrowding, congestion, price inflation of basic services like utilities, rising youth unemployment.
But before we place all the blame on the government, what about the private sector? Businesses are warning politicians against the idea of cutting immigration levels, which will exacerbate the ?skills shortage? crisis.
But instead of blaming the government, let us thrust this provocative idea?could the ?skills shortage? crisis be at least partly due to businesses not investing in the training and development of its workers? There are some statistical and anecdotal indications (and you may even personally experience them):
- Youth unemployment rate in Australia is three times nation average
- Long-term unemployment continue to rise (see Growing structural unemployment in Australia)
- Discrimination against the unemployed job-seekers
- Discrimination against those who do not meet the stringent ?experience? requirements
If you look carefully at the above list, you will notice a commonality among them: the presence of a positive feedback loop (see Thinking tool: going beyond causes & effects with systems thinking) ? the disadvantaged job-seeker becomes less desirable as an employment candidate, which further disadvantages that job-seeker. Anyone in this situation will eventually give up in seeking employment, which results in him/her becoming long-term unemployed.
From some anecdotal observations, businesses (especially the small businesses which account for the majority of employment in Australia), on the other hand, have ?no time? to invest in training and development of its workers. Since they are flat out producing and making ends meet, such investments are considered dead monies that do not contribute to the bottom line. Furthermore, given the ?skills shortage,? they would not want to invest on their workers, only have them poached by other business. Again, there is a positive feedback loop here: lack of investments result in lack of growth in productivity, which in turn reduces the margins required for investments (see Another Achilles Heel of modern society- narrow margin), which discourages further investments, which result in further lack of growth in productivity.
As you can see by now, the easiest way out for the business sector is for the government to increase the intake of skilled migrants. That way, they can have the skills they require at the expense of others (those who trained the skilled migrants back in their home countries). That is why you will see them business industry leaders lobbying against the politicians? popular intention of cutting migration.
If for whatever reason, Australia does not fall into a deflationary recession, and pressure for the economy to increase its production of goods and services intensifies, we will see the ?skills shortage? crisis intensify. There will be further upward pressure on wages, which will increase the costs for businesses. Rising cost will place further pressure on the viability of some businesses, which will in turn increase the risk of business failures.
At the same time, if nothing is done about the long-term unemployment issue, then there will be a further division between the haves and have-nots in Australian society as those who are currently and appropriately skilled and employed will enjoy higher income while those who are unemployed and/or underemployed will be become more so. As more and more unemployed join the ranks of long-term unemployed, it will result in more social problems and further increase in the budgets of the government through increased welfare payment.
On the other hand, if the immigration spigot is loosened to alleviate the ?skills shortage? crisis, it will lessen the upward pressure on wages but put upward pressure on the price inflation of essential services, which in turn will induce the RBA to increase interest rates further. For a country where households are highly indebted, rising interest rates and/or price inflation will further strain family budgets, which will further increase the risks of debt defaults. This situation is a classic illustration of the Austrian Business Cycle Theory. As we quoted Ludwig von Mises in The first step in an economic slowdown?mal-investment in capital,
It is customary to describe the boom as overinvestment. However, additional investment is only possible to the extent that there is an additional supply of capital goods available. As, apart from forced saving, the boom itself does not result in a restriction but rather in an increase in consumption, it does not procure more capital goods for new investment. The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment. The entrepreneurs employ the available supply of r + p1 + p2 as if they were in a position to employ a supply of r + p1 + p2 + p3 + p4. They embark upon an expansion of investment on a scale for which the capital goods available do not suffice. Their projects are unrealizable on account of the insufficient supply of capital goods. They must fail sooner or later. The unavoidable end of the credit expansion makes the faults committed visible.
In the same way, if the Australian economy continues to ?boom,? entrepreneurs may not account sufficiently for rising price inflation (due to lack of infrastructure) or wage levels (lack of appropriately skilled labour). This will make many investment projects unrealizable (especially the mining projects). In fact, some businesses may even not be viable. For example, a recent survey found out congestion is affecting worker productivity and causing business owners to think of closing their businesses or move it elsewhere. These are symptoms that the economy does not have sufficient resources to maintain the current trajectory of growth. Eventually, more and more liquidation of mal-investments (e.g. projects, businesses, etc) will happen. Unfortunately, with the private sector of the economy highly indebted, this can trigger debt deflation. The end result will be a massive waste of unrealizable capital investments and projects. In 2007, we caught a glimpse of the effects of mal-investments?Owen Hegarty, former MD of Oxiana (today is called ?OZ Minerals?) said in a newspaper interview (see Rising metals price=rising mining profits? Think again!),
The cost increase at Prominent Hill makes Oxiana the latest resource developer to feel the impact of tight construction market conditions and cost increases in materials and equipment ? the so-called downside to the commodities boom.
…
“I think we’ve nailed it now,” Mr Hegarty said. “We’ve got that little bit of extra padding with the contingency (up from $75 million to $88 million) and we’re only 12 months away from commissioning. Being within the zone of a 30 per cent increase inside of 12 months is actually not too bad when compared with what other people are experiencing.
“Just about every second you turn around, the price of something else has gone up.”
From what we see, the Australian economy has hit a ceiling for which it is very hard to break through. For this reason, as Australian-based investors, we are looking into increasing our allocations to investments that have greater exposure overseas (note: this is NOT financial advice).
