Australia: A Vacation from a turbulent world

One half travel log, the other half a series of observations

For the last three and a half weeks, a troupe of coevals and I toured the East Coast of Australia. Starting in Brisbane, we hired a motorhome and ended up in Melbourne for a wedding. It was a tremendous adventure, and somewhat predictably, I had my head turned by what appeared to be a blissfully contented country where people are richer, work less, are better looking, and are generally more optimistic. It may be a cliche, but from a dour Brit’s perspective, Australia is indeed the “lucky country.”

There is no foreigner’s anxiety. Instead, one feels they are in some idealised version of Kent, with the addition of spectacular vistas and exotic wildlife. “Sweet Caroline” and “West Virginia” are the corny staples we hear while seeing our first AFL game at the Gabba. One could just as easily have been at Wembley. More rough and ready locations like Cessnock have an Appalachian vibe, with biker jackets, pasty tattooed torsos and methamphetamine in no short supply. Sydney Harbour and the Mornington Peninsula are essentially Anglophile homages to the great lakes of Lombardy. The Port Sea Hotel, overlooking Port Phillip, is leisurely and patrician, almost an ode to the Kennedy Compound in Cape Cod.

Every region is saturated in natural beauty. While the Blue Mountains, situated west of Sydney, are a favourite of backpackers, Wilson's Promontory is a true gem and is only three hours outside Melbourne. Wombats, robust and stout, a marsupial incarnation of Dominic Sandbrook, will happily waddle up to campers. Emus keep to themselves while Kangaroos and Wallabies hop around with wild abandon. The country’s herbivores don’t seem to be the sharpest tools in the box. While I am generally sceptical of Goldsmith-style rewilding, a big cat or two would concentrate the minds of the doltish fauna. Maybe some semi-fraudulent U.S. biotech startup can bring back the Tasmanian Wolf.

Blue Mountains

We managed to enjoy two wine regions. The Hunter Valley, a sizzling, musky grassland north of Sydney, specialises in dry Semillons and Shiraz. The wine is coarse and bristles with harsh tannins, tasting like a forest floor. Mornington, east of Melbourne, has a cooler climate and so specialises in jammy Pinot Noirs. Throughout the trip, food was generally excellent, more flavorful than in Britain and less saccharine than in America. For gym-bros, meat is extremely cheap.

Overall, Australia feels an amalgam of all that is desirable in the Western world. I say this perhaps because I charted a fairly bougie course. Next time, I would avoid Nimbin, a strange settlement south of Brisbane. While it has the charm of faded hippy glory, it is mainly just amiable boomers zoning out while they rattle dreamcatchers, get stoned and heavily pet unfortunate sheepdogs. Not very rock and roll.

Although I came back wishing to spend more time there, from an analyst's perspective, Australia is a little odd. It has indexed its economy to the post-1991 world, becoming essentially a mine for East Asia while building the rest of the economy around real estate, pension funds and high levels of immigration.

It has shown almost no interest in meaningful industrial policy, being a commodity and services power in a region dominated by manufacturing giants. While so far, this has worked to the point that no respectable individual suggests any deviation, there are some signs of vulnerability as the world convulses towards a more uncertain and turbulent future. Without further ado, here are some more serious observations.

Mount Oberon at Wilson’s Prom

Minerals, pension schemes and foreign capital

By global standards, Australia is a pretty insular economy. Trade accounts for a relatively small share of GDP (about 50%), although this is growing quickly. Exports are dominated by iron ore, coal, natural gas, minerals, agricultural merchandise, and precious metals. The most significant non-commodity exports are travel related to tourism or university education via student visas.

Immigration is very high by international standards. Australia is something of a forerunner to Britain’s Boriswave, where large-scale student importation is used to boost service exports, loosen up the labour market, and maintain upward pressure in the housing market. Construction of new dwellings has slumped, while household debt is well over 100% of GDP, the highest in the world besides Switzerland. It therefore seems the country faces, like Canada and the UK, a very challenging housing market that is hard to unwind at the institutional level.

The country’s economy is heavily reliant on mining operations in Western Australia, with BHP Group being the country’s largest corporation in terms of revenue. Mining is about 14% of GDP, and mining profits represent close to 50% of all business profits. These returns have rocketed since Covid, but mainly due to commodity price fluctuations rather than any increase in real output. The minerals have been exported to manufacturers in East Asia, who pass the price increases on to Australian consumers buying Mitsubishi cars and Hisense televisions.

While there are significant Australian mining companies like BHP and Fortescue, the mining industry overall is 86% foreign-owned based on shares. Australia is the third-largest exploration market behind Latin America and Canada. However, while Canadian miners are net exporters of investment in mining opportunities abroad, Australia is a net recipient of international exploration investment. In 2023, almost AUS$400 billion was invested in Australian mining, while Aussie miners invested just AUS$195 billion in foreign opportunities.

In terms of market capitalisation, Australia’s stock market is dominated by its big banks: Commonwealth, Westpac, National Australia Bank, ANZ Bank and Macquarie. It has a few technology companies, including the large biotechnology company CSL, and Atlassian, a major software vendor. But broadly speaking, Australia is a services economy with its exports centred around extractive industries located almost entirely in the West of the country.

Manufacturing is a peripheral sector, comprising just 6% of GDP. In Britain, manufacturing is marginal, but it still has a significant share of exports, and flagship capabilities like the production of aircraft engines and cars remain. As of 2017, Australia has no domestic automobile production at all. This is not surprising as Australia is so close to East and Southeast Asia. While the Aussie car industry was in decline for a long time, a 2013 free trade agreement with Thailand finally cooked the Kookaburra. There is a good history of the Aussie car industry here.

Australia’s existing manufacturing is tilted towards lower-value-added process industries. The value-added production ratio (GVA as a share of turnover) is 29%, well below the OECD average of 36%. For example, it is the sixth largest producer of aluminium, thanks to its relatively cheap electricity prices.

There appears to be no significant lobby for manufacturing. Commodity booms during the 21st century have appreciated the Australian dollar and made manufacturing exports less competitive. Despite being a net exporter of natural gas and crude oil, Australia relies almost entirely on imports for refined petroleum products like gasoline, diesel, and jet fuel. The country is a significant net importer for nearly all bulk and speciality chemicals.

Australia has run a small but near-continuous current account deficit for decades, despite having a trade surplus. Reliance on foreign investment means profits disproportionately go abroad. Mining royalties and taxes are just 6% of government revenue. The vast bulk of profits go to foreign shareholders. The United States and Britain are the largest holders of Australian equities and debt assets (about 40% collectively). China owns a mere 2%. Most of the other large owners are East Asian and European countries.

Australia, despite being a major commodity exporter, does not have a significant sovereign wealth fund. The Future Fund, established in 2006, received an initial injection of AUS$60 billion, and there have been no cash injections since. Its stated purpose is to maximise returns to cover unfunded government pension liabilities. Currently, the fund stands at over AUS$200 billion.

Instead of using a SWF to secure long-term pension financing, the government has mandated compulsory superannuation. Here, companies have to put aside a significant share of an employee's salary into a pension fund, which can be placed in various investment vehicles. There is a whole subset of specialist “super” funds that Aussies can use to build their pensions. Aussies have over $1 trillion in public pension assets, the fifth largest globally and nearly double that of Britain.

This arrangement currently benefits Australians greatly and limits the need for the Australian government to spend more than 5% of GDP on state pensions. In contrast, European governments, including Britain, spend significantly more.

Australia is, therefore, an economy that defies traditional analysis. It has relatively low government spending, a low debt-to-GDP ratio, and a low trade-to-GDP ratio. At the same time, its exports are undiversified and reliant on China and smaller Asian manufacturing-focused economies. Meanwhile, it relies on the U.S. and its allies for infusions of foreign capital, and has a very high household debt.

This appears to work. The current account deficit exists in tandem with a healthy trade surplus, and Australian businesses and politicians are largely happy with foreign ownership, which is dominated by friendly Western countries. Government debt, unlike in Britain, is not seen as a major cause for concern. Because Australian manufacturing was always pretty small, its decline does not have the same political ramifications as it does in the U.S. and Europe, and Australia has no genuine desire to be a technological or military power. Instead, the country enjoys exporting to Asia and borrowing from America and Europe, while being a largely self-contained economy.

There are some causes for concern. The reliance on ever-expanding immigration for travel exports and maintaining house prices brushes up against increased public dissatisfaction. While Australia’s GDP growth is the envy of the Western world, its GDP per capita has followed the same trajectory as Canada, reaching its high point in 2012 before stagnating in U.S. dollar terms. Productivity growth has also been poor, in no small part because manufacturing and scientific industries, a key driver of productivity growth, are such a small factor in the economy.

While demand for Aussie iron ore is likely to remain, demand for coal and natural gas could decrease in line with changing electricity grids, potentially limiting the dividend of future commodity cycles. Meanwhile, Australian immigration is proving politically polarising, and the promise of attracting talent is not really translating into a more innovative economy. Lowering immigration from historic highs is supported by the current government, but could lead to significant pushback from businesses that have gotten used to slack in the labour market, not to mention universities and real estate investors.

Australia could consider industrialisation, becoming a more technology-intensive country, and moving up the global value chain. But, in truth, this is somewhat anathema to how the vast majority of Australians seem to think about the world. There is next to no desire to radically improve geopolitical influence or take on the trappings of a world power, even if the ingredients (a resource-rich continent with a well-educated population and lots of open space) might permit such a venture.

This is why I, as a signed-up nuclear bro, am somewhat sceptical that Australia has the chops for a civil nuclear industry, as the Liberal opposition is proposing. If a cadre of live players were planning to expand energy-intensive manufacturing to counter overeliance on China, the value of nuclear would be obvious. But Australia is such a marginal emitter, with few plans for industrial expansion, that it can muddle along with gas, coal and renewables.

This is not likely to lead to particularly competitive energy prices, but with only a small heavy industry, policymakers are unlikely to change course. Doing so would upset the synergistic relationship Australia currently has with East Asia, where almost no country is willing to surrender market share in manufacturing exports.

Even if its miracle economy is running out of steam, Australia just has to do less worse than Britain and the European Union, and it can still welcome a steady stream of educated graduates from the West for years to come.

In summary, Australia currently feels like the “30 more years” option for young people. The country’s trajectory does not appear particularly more auspicious than that of Britain or Europe in the long run. Still, if you want to avoid years of toil and disappointment being a policy wonk, there is the makings of a truly splendid few decades down under.

Correction: The initial post stated Australia did not have an SWF, a major inaccuracy. The Future Fund, made in 2006, was funded out of government budget surpluses to cover superannuation liabilities for government workers. It has received no cash injections since. Unlike other SWFs, it does not bank annual resource royalties, fund a significant share of pensions, or stabilise the currency. It also has no mandate to make strategic investments in Australia. It could be argued that it, therefore, is not a real SWF, although there are arguments to make it one.