What is missing from our economic commentary?

If you listen too much to the financial news at the moment you would be very worried about Australia’s economic future.

This is because so much of the focus is on the collapse in commodity prices.

The price of iron ore, coal, copper, gold and most other commodities are at or near six, seven or eight year lows.

Also read: Turnbull government using 'shonky reasoning' on tax

What is missing in much of the commentary on the economy, and something that is almost always overlooked, is the simple fact that commodity prices are still well above the levels prevailing from 1992 to 2004, a time of strong economic expansion.

In many cases, today’s low commodity prices are still double, triple or even quadruple late 1990s levels.

The 12 year stretch of a strong economic growth up to 2004 was clearly supported by factors other than stratospheric commodity prices and a mining investment frenzy.

Looking back at that period of economic history saw consumer spending, generally buoyant construction activity and the early stages of a surge in services – finance, education, health and tourism – support the economy.

Fast forward to today and despite lower commodity prices, it is clear that the economy is still growing, a reasonable amount of jobs are being created and those factors are occurring with low inflation and very low interest rates.

Also read: NSW, Vic keeping economy going

This is not to say today’s economy is perfect. Far from it.

Economic growth should be a little stronger and unemployment lower, but to focus on the couple of areas of the economy that are not doing well, especially commodity prices and mining, is to miss the sectors that are either chugging along or are poised for a strong expansion.

Helping the economy to do well into 2016 include a likely lift in consumer spending, aided by a sharp lift in consumer sentiment in the last couple of months.

Recall the household spending accounts for around 55 per cent of Australia’s GDP and is about 10 times larger than the whole mining sector.

What you and I will spend in the supermarket, café, on electrical goods and on health and education over the next year will be more important for bottom line GDP than mining.

Housing construction is also strong, with a record number of new dwellings being built in 2015.

All these new dwellings need furniture, kitchen appliances and the myriad of homewares, the purchase of which will add to economic activity.

Also read: Wages still at record low but uptick ahead

There is growing evidence that the very low level for the Australian dollar, currently in a US70 to US72 cent range, is seeing a surge in foreign student demand for university places in Australia, a sharp rise in tourism inflows and it has seen many Australians choose to holiday in Queensland and Tasmania, rather than Hawaii and Bali, simply because of the cost.

While Australia would clearly benefit from a rebound in commodity prices and further falls would dampen the pace of economic growth, it is safe to say that 2016 looms as a year where there will be decent economic growth in Australia regardless of the price of iron ore and coal.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.