Australia’s rise and rise provides global economic perspective

At some point in the current quarter, if it hasn’t happened already, Australia will replace Spain as the world’s 12th largest economy.

With Olivier Blanchard, the head economist of the International Monetary Fund, this week forecasting that the current global sluggishness will continue for another six years at least, there’s a message here for everyone in this country: Australia has managed to make its way through boom, bust and weak recovery, without losing its way economically, just as we managed to navigate and survive the first and second oil shocks and resources boom and the great slowdown of the early 1990s. Only this time we did it more effectively and with less human misery.

Yes, China and other rapidly-growing Asian economies helped. But it is testimony to both a generation of reform-minded politicians, including the architects of our financial regulatory system, and the smarts of current policymakers — inside an independent central bank, in Treasury and in a government wise enough, or perhaps inexperienced enough, to follow their advice without too much ideological obsession.

According to the most recent IMF data from earlier this year, its estimate of GDP for the calendar year 2012 shows the top 20 economies are in transition.

Brazil is forecast to overtake the UK by 2015 (although if the UK remains mired in austerity-driven recession that will come much sooner); both will overtake France; by 2017 Italy, as late as 1993 the world’s fifth-largest economy, is predicted to have fallen to 11th; by that time, Indonesia will have nearly reached the same size as Australia.

But all of that assumes no changes in predicted currency valuations. As late as 2006, when the dollar hovered around the mid-high 70 cents, Australia was 15th and trailed the likes of South Korea and Mexico. In 2006 dollar terms, Australia is still 15th, even if you convert every other economy into 2006 dollars.

As any Australian exporter will tell you, though, it’s not 2006. And calculated at US$0.90, the sort of level many are talking of as fair value, Australia’s GDP is still just ahead of Spain.

Let’s look a bit more behind the figures: for starters, this is not the first time Australia has been the world’s 12th biggest economy. We were 12th in 1996, 1990, 1989 and 1984. And we were 11th in 1983.

There’s also the issue of population growth. According to the CIA Fact Book, Australia has a faster population growth rate than all but Saudi Arabia and Turkey in that group. It’s far easier to grow an economy when its population is growing at a fast clip.

But when adjusted for population, Australia’s performance improves in comparison. The IMF’s GDP per capita in US dollars has Australia clearly in third place

Australia moved into third spot on that table in 2011 and is forecast to stay there, indeed will threaten Switzerland for second spot by 2020. The rise in the value of the Aussie dollar after the financial crisis has driven this — we leapt from US$44,000 a head to US$65,000 a head in just two years — but also important was steady economic growth when virtually every other developed economy was going backwards.

Potentially more relevant is GDP per capita adjusted for Purchasing-Power Parity. That adjustment is designed to reflect efforts by organisations like the OECD and the World Bank to eliminate differences in price levels between countries, theoretically giving us a better perspective than straight GDP per capita in US dollars. The result tends to favour oil sheikdoms and developed micro-states like Singapore, and is a poor tool with which to project forward because the current dataset is old — the 2005 pricing data is still in use, while a 2011 set is being collected globally. The IMF, for example, currently projects Ireland to return to ninth highest GDP per capita based on PPP, while in fact the once-purported “Celtic Tiger” may well return to being a mendicant state.

You’ll see, too, Iceland’s appearance on that list, which also undermines its utility — Iceland went broke in the GFC, and even though it is recovering, we have yet to see a worthwhile estimate of the damage in terms of GDP loss, GDP per head and on a parity pricing basis.

But it does have its uses: Australia was 18th on this list in 2007, like we were in 1995 — we didn’t move at all over 12 years. And that’s where we’d been for most of the last 30 years, ranked in the teens, or even lower, down in the 20s at the end of the 1980s. But since 2008, we’ve continued to grow while other countries have marked time or gone backwards.

Those who would have us believe we’re on the verge of destruction because Australia failed to follow their own ideological obsessions might care to explain the apparent mystery of  where we now are in the world.