Aussie Tourism Industry Not The Reason For Stable Unemployment


Australia’s tourism industry has had a good year. Earnings rose to $17 billion, making tourism a bigger deal even than coal. In fact, tourism is now the nation’s second largest export earner, trailing only iron ore.

According to Barclays, non-mining exports grew by 7% over the past year. The UK-based bank says that this growth came mostly on the back of a rise in tourism.

This report prompted suggestions from some quarters that tourism was responsible for offsetting declining commodity exports. There were also suggestions that it may have prevented the unemployment rate from rising.

It’s certainly positive that the economy is finding new ways of achieving growth outside of the resource sector. But we should be careful not to make any premature conclusions about its impact on the economy.

By this I’m referring to a recent comment from National Australia Bank’s chief economist, Ivan Colhoun. Mr Colhoun believes the non-mining sector is the reason why unemployment is holding steady at 6%.

No doubt tourism, and non-mining as a whole, is playing some part in this. But there are a few other considerations worth noting.

For example, the Australian Bureau of Statistics recently noted that employment is outpacing population growth. The fact that fewer migrants are seeking employment opportunities in Australia is telling. If nothing else, it’s a viable explanation for the jobless rate holding steady.

What’s more, the non-mining sector doesn’t account for a growing imbalance in the terms of trade. The terms of trade simply describes the value of exports against imports. That is, the more we export, and the less we import, the better our bottom line is.

Unfortunately, Australia’s terms of trade is nosediving.

In the past year alone, the terms of trade has fallen by 11.4%. In April we recorded the worst monthly trade deficit in four decades.

The point here is that the growth in non-mining earnings won’t offset the decline in the terms of trade. If the terms of trade continue to widen, which they’re doing, then the gains in non-mining will be marginal at best.

If population growth continues to decline too, then the pressure on the jobless rate should ease. But that’s the best case scenario.

And we certainly shouldn’t be relying on non-mining sectors to keep the unemployment rate at 6%.

A small win for the Reserve Bank

Earnings growth in non-mining sectors will come as a relief to the Reserve Bank of Australia. The RBA is hell-bent on weening the economy off its reliance on resource exports.

Boosting non-mining sectors like tourism was a big part of their broader aims. The idea was to lower interest rates, put downward pressure on the Aussie dollar, and lead an export driven comeback. If tourism is anything to go by: mission accomplished.

But that’s not quite true, is it?

Boosting non-mining was always going to be a difficult task. It might have worked better if the price of iron ore was closer to US$80 a ton, not US$60. Whichever way you look at it, the rebalance is not working to the extent required.

Until the terms of trade tilts back in our favour, that’s not likely to happen either. Unfortunately, it won’t be tourism leading any export driven fightback. It’ll have to be the mining industry. By now, you can see the problem with that idea.

Commodity prices continue to fall, with even bleaker prospects for the future. With no rebound in prices forthcoming, that puts a lot of pressure on non-mining sectors. The early signs are acceptable, but totally predictable. It had to work considering how much effort is being made for it to succeed.

Unfortunately, making non-mining sectors the lifeblood of the economy is easier said than done.

A closer look at tourism’s rise to second spot

The tourism industry’s share of export earnings is rising for two reasons.

The first, and obvious one, is that travelling to Australia is becoming cheaper. The lower Aussie dollar makes visiting Australia relatively cheap. That’s especially true for American and European tourists. Their respective currencies measure up favourably compared to the Aussie dollar.

The second reason is that falling commodity prices are eating away at total mining revenues. As a result, the share of GDP is falling in comparison to non-mining sectors.

The net effect of both factors is that Australia is a more attractive destination than it’s been since 2009. That was the last year in which the Aussie dollar averaged anywhere near its present lows.

As a result of the cheap dollar, it’s no surprise that tourism is up as much as it is. ABS figures show that inbound tourism for May was 11% higher than at the same time last year. Total earnings from tourism amounted to roughly $17 billion.

In contrast coal exports totalled $16.5 billion by comparison. However it’s worth noting that coal exports were down in recent months as a result of severe weather at ports.

Nonetheless, tourism now makes up 2.5% of Australia’s entire GDP. That makes it the second largest export, ahead of coal at 2.3%. Coal’s share of GDP has fallen sharply from its peak of 5.7% at the height of the mining boom.

Meanwhile, iron ore, whose share of GDP was once 5.1%, now sits at 2.7%. If the price of iron ore continues to fall, as predicted, tourism could become the number one Australian export earner soon. Iron ore currently trades at US$61 a ton. Yet analysts at Goldman Sachs predict it could drop to US$52 a ton by the end of this year.

Finally, it’s worth noting that we’re talking about tourism’s share of nominal GDP. Coal and iron ore still contribute the most to total GDP growth. Australia’s economy, in nominal GDP terms, is still growing. However, as commodity prices have fallen, they’re making up a relatively smaller share of the overall GDP.

The growth in tourism, and non-mining, is a positive trend. But it’s also entirely expected, considering the RBA’s aggressive rate policy. It’s easy to point to it as a sign that we’re becoming less dependent on mining. But that doesn’t necessarily make it true.

The mining industry, along with slowing population growth, will continue to put pressure on the unemployment rate. Tourists can only help us up to a point.

Mat Spasic,

Contributor, The Daily Reckoning


PS: The RBA’s efforts to prevent long term economic decline will come to naught. There are too many effects in motion that spell trouble for the Aussie economy.

The Daily Reckoning’s Greg Canavan believes that the good times are coming to an end for Australia. As one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession in 2015.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show you why debt levels have spiralled out of control. And why that means a recession is almost inevitable. But there are actions you can take to lessen the impact of the recession.

Download your copy today and Greg will show you the steps to take to protect your wealth from the fallout of a crash. To find out how to download his free report right now, click here.


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