In the next few years the Australian economy will become larger than Russia’s in US-dollar terms. And yes, you read that right.
The latest World Economic League Table, published by influential British consultancy the Centre for Economics and Business Research (CEBR), predicts a stunning divergence in the the two nation’s fortunes.
For some strange reason, CEBR chose to release its latest league table on boxing day, meaning it received little attention from most media outlets.
But there it is in black-and-white. By 2026, Australia will have the 11th largest economy, up from 13th today, and Russia will be tumbling back the other way – from a current 11th place to 17th by 2032.
Australia’s GDP is currently US$1.2 trillion and Russia’s is US$1.3 trillion, so there isn’t far to go to overtake the Great Bear.
More importantly, Australia is on the right side of history in two respects.
Firstly, we have a small, growing population that is disproportionately topped up with skilled workers each year – either directly via skilled migrant visas, or indirectly via Australia’s booming eduction exports sector whose graduates often wish to apply for permanent residency.
Russia’s population, which is six times the size of our own, went into decline between 1992 and 2008. It is currently growing at 0.2 per cent per annum, compared with a rate of 1.4 per cent in Australia.
Secondly, we are an economy transitioning away from dependence on low value-added commodity exports.
While we ramp up value-added sectors such as processed foods, tourism, education exports, advanced manufacturing, professional services exports and the like, Russia is lopsidedly reliant on oil and gas.
CEBR’s report says the shifting energy scene is a big part of its altered outlook for global growth.
It notes: “This year [our] main revisions reflect dramatic changes in economic assumptions. If major risks can be avoided, our central forecast is for a period of stronger growth than we have seen for the past five years, driven by cheap energy and by technology.
“The price of oil has been edging down over the last decade, driven by weaker demand, a falling ratio of energy usage to GDP as output dematerialises and, on the supply side, the growth of energy production from renewables and from fracking which has changed the traditional relationship between GDP and oil prices. We expect this change to persist through to 2032.”
CEBR also sees a few changes within our neighbourhood.
Indonesia, which currently has 11 times our population, will overtake Australia in the GDP stakes within 15 years.
South Korea – in the absence of any calamitous military action – will stay slightly ahead of Australia to enter the top-10 of the league table in the mid 2020s.
And China will bump the US off the top spot within 12 years.
Is biggest best?
All of these forecasts come with two important caveats.
The first is that having, say, twice the nominal GDP of another nation doesn’t mean you’re twice as rich.
Economists use the US dollar figures as a rough guide to prosperity, but at ground level they calculate another ‘purchasing power parity’ (PPP) figure.
GDP is a sum total of the value of transactions within a country and the value of trade with other nations. But what that dollar can actually buy at home will determine how ‘rich’ a citizen feels.
In Australia, housing has become monstrously expensive since the turn of the millennium, for instance, so the PPP value of GDP has not grown as fast as its nominal value.
The second point – hinted at by some of the population comments above – is that growth in GDP per capita is much more important than the size of the national pie.
Australia’s population is growing rapidly, which has created some anti-immigration sentiment based on the idea that foreigners are somehow diluting our prosperity.
In fact, Australia has pulled off something quite miraculous. Despite high population growth – and partly because of it, due to the huge export earnings in the education sector – our GDP per capita has continued to increase.
That’s quite a feat given some of the gloomy forecasts that accompanied the dying days of the mining investment boom in 2013.
As we head into 2018, we have the strongest employment growth since 2005, and economic growth of 2.8 per cent for the 12 months to the end of September.
That really is worth celebrating – perhaps by raising a glass of Russian vodka? Surely it’s the least we can do.