The rise in the unemployment rate and sub-trend growth of the economy over the past couple of years has prompted many Australians to ask: "how can the economy continue to grow?"
From about 2005, Australia enjoyed a sharp run-up in the prices of our key commodity exports, which led to an unprecedented boom in mining investment. The benefits were spread beyond the narrow confines of the mining industry, with strong growth in employment and wages across a range of industries. But as commodity prices and mining investment have turned down, many are prompted to ask "what's next?"
Christopher Kent, Assistant Governor (Economic) at the Reserve Bank of Australia (RBA), has highlighted the increasing importance of household and business services in the economy. Over the past 30 years, households have increased the share of their spending devoted to services, from about 53 to 65 per cent of their total consumption. Health and education account for a large part of this and households are also spending a larger share of their growing incomes on recreation and leisure services, as well as communication and financial services. The share of employment in household services has also increased from 25 to 33 per cent over the past 30 years.
The depreciation of the Australian dollar should benefit both goods and service industries exposed to trade. Exports of services, which include education and tourism as well as business services, were worth about $60 billion in 2014, and somewhat surprisingly, were a touch higher than iron ore exports at the end of last year.
The Australian economy has good prospects for growth over the longer term. We have the advantage of a well-educated workforce, strong population growth and a robust institutional framework. The RBA's central forecast for economic activity is that growth should gradually pick up over the next couple of years and the very low level of interest rates suggests the housing market will remain strong. The services sector, which is relatively intensive in terms of employment, should also continue to grow in importance.