A new report from PricewaterhouseCoopers has found that one third of Australia is already in a recession. PwC’s research showed that 35% of regions across the country are contracting. They point to a growing trend of falling incomes weighing down on household wealth.
But this decline in living standards has had a secondary effect. Increasingly, Australia is becoming a nation of concentrated prosperity. We’re relying on a handful of productive areas to keep the economy ticking along. The extent of this dependence is worse than you might think too.
A mere 10 locations generated one in every five dollars of total national income. That’s from a total of 2,214 areas included in the research. In other words, less than 0.5% of regions generated 20% of national income. That’s a worrying trend for two reasons.
For one, it highlights the growing inequality across the broader economy. Wealth creation is concentrating in the hands of the few. And it’s coming at the expense of millions of other Australians.
Secondly, it’s making the nation as a whole more dependent on the success of these few.
Largest percentage of growth coming from just 10 locations
Among the fastest growing regions in the past 15 years were Melbourne and Sydney’s business districts. Since 2000, Melbourne’s economy has grown by 76%. That compares favourably to the national economy, which expanded by 46% in the same period.
Alongside Sydney and Melbourne, the iron ore producing region of Pilbara in Western Australia was another strong performer. The key mining region grew by an impressive 776% between 2000 and 2015. Yet growth in Western Australia is likely to be more subdued as mining revenues fall.
Nonetheless, between 2004 and 2014, incomes across the best performing 10 locations grew by 17.9%. That’s roughly the equivalent of $27 billion flowing into those 10 regions.
In contrast, the worst performing region was in Queensland’s Nanango region. Over the past 15 years, the local economy there has shrunk by 61%.
These figures are a tiny reflection of the growing concentration within the economy. But what do they tell us about the economy’s future? We could look at the mining region in WA to get an idea for this.
If commodity prices continue to fall, as is predicted, it’ll only serve to speed up regional economic decline. And it’ll put more onus on Sydney and Melbourne to lift national growth rates.
That’s not exactly the ideal outcome if we’re aiming for equitable growth. If the focus continues to shift to the two big cities, what will happen to the rest of the country? It’ll only worsen their current situation.
As we’ve seen, incomes and wealth is falling across 35% of Australia. What kept that in check for over a decade was the balance within the economy. But that’s only going to change for the worse as mining revenues decline.
This also brings up another important question the government will need to consider. Specifically, what areas of the nation should we be trying to promote? Is it those regions that are already in a recessionary state? Or is it the ones which can achieve the highest growth rates in the future?
Whatever answer they come to, it seems as if economic decline is unavoidable. Moving investment away from underperforming areas will only make inequality worse. And there’s no telling how that will drag on the national economy as a whole.
By the same token, boosting prosperous regions could lead to a further concentration of wealth. It’s a lose-lose situation as far as the government is concerned. More importantly, any decision they take will affect millions of Aussie households for the worse.
Where governments and businesses should invest in the future
The PwC report puts national infrastructure front and centre as part of its recommendations. It suggests improving transport links among already prosperous regions to boost growth. PwC believes there is sense to promoting fastest growing regions ahead of the others.
Rob Tyson, a researcher at PwC, explains why:
‘Fewer key locations will be relied upon to drive an increasingly large share of economic growth. From an economic point of view [we should] be less worried about the fact that one in three locations are contracting.’
In their view, such a strategy could offset the drag on the economy coming from recessionary areas. That may be true, provided the economy can extract further gains from the most productive locations.
He also suggests the government would be wise to spend on improving Sydney’s transport infrastructure. The idea is to bring the four major regions representing greater Sydney closer together.
But he also raises a counter point about the effects of such a strategy. Tyson admits that social and economic equality could suffer as a result. That makes it a tricky issue for the government to contend with looking ahead.
After all, the government is responsible for ensuring that all Australians benefits from national spending. Yet economic realities may override any question of fairness. It could push the government towards making some unpopular decisions in the future.
For example, it could result in the most prosperous locations receiving the bulk of future government spending. With mining tax contributions declining, future growth is likely to come from those areas already experiencing rapid expansion. That may prove too enticing for the government to ignore. Even if such a decision would leave those areas in recession underserved.
Sadly, it may not be enough to prevent this trend developing into a national recession. The Daily Reckoning’s Greg Canavan predicted this at the start of the year. As one of Australia’s leading investment analysts, Greg has been warning for months that we’re sleepwalking into a recession.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why the other two thirds of Australia could face the same fate. Falling mining revenues will affect government spending for years to come. As a result, rising government and household debt will continue the drag on the economy. Most worryingly, Greg has proof that the RBA know that a recession is imminent.
Download your free report to find out what steps you can take to protect your wealth from the fallout of the recession. To find out how to download the report right now, click here.
Contributor, The Daily Reckoning