Perhaps the worst part about Australia’s alarming new outsourcing trend is that some analysts saw it coming four years ago.
A study from Australia’s National Institute of Economic and Industry Research, or NIEIR, released on Tuesday, found that the service industry is currently outsourcing more than 20,000 jobs overseas every year. Without government intervention, up to a million Australian service sector jobs could move offshore during the next three decades.
Professional, administrative and financial services jobs were the hardest hit. The less-specialized jobs are moving to cheaper locations like India, while more specialized skills are being taken on by offshore workers in fully developed countries like the United Kingdom.
This would seem a surprising turn of events for economically robust Australia, except that it was predicted with startling specificity back in 2008. That report, also from NIEIR, posed a question: “Without Plan B -- a strong services sector -- what is Australia’s future should China stumble?” The study authors estimated that annual outsourced jobs would reach -- you guessed it -- 20,000 by 2012.
What NIEIR saw early on was a dangerous dependency on Chinese growth; they argued that policy changes were in order, but their warning went largely unacknowledged. Now that China’s economic growth appears to have leveled off, analysts worry it may be too late to stop Australia’s slow drain of service sector positions.
Mine All Mine
At the time of NIEIR’s 2008 report, it would have been easy to ignore such dire warnings. Australia was enjoying an economic boom, even while other world economies were tilting toward recession.
China’s rapid growth, and the accompanying rise in demand for resources, buoyed Australia’s economy during those salad days. In particular, China’s appetite for coal and iron ore -- which are abundant Down Under -- helped the People’s Republic become Australia’s largest trading partner.
As a result, Australia’s mining boom kicked off in 2007. By 2011, the industry was generating US$179 billion in revenues per year, according to IBIS.
With profits like those, it is easy to understand why Australia, which was once bound tightly to Western economies like its mother country Britain, jumped ship over the last decade in attempts to form stronger ties with its Asian neighbors.
Its big mistake was throwing out the lifejacket. Now that Chinese growth is slowing, Australia is in need of a backup plan and is at risk of being dragged even further down under.
As it turns out, mining is a risky business. Although it has great potential for profitability, it is also highly capital-intensive and does not require much in the way of a workforce. The industry currently employs about 270,600 people, according to government data released in September. That’s only 2 percent of the national labor force.
In other words, the heavy investments necessary to sustain mining don’t raise employment figures significantly and drain funding and opportunities for workers in other sectors of the economy.
That’s why the International Monetary Fund issued a warning to Canberra while the mining profits were still flooding in. In a Regional Economic Outlook published in April 2011, the agency advised Australia to keep some of its abundant mining revenues for a rainy day in case the era of high commodity prices came to an end.
Now, the authors of the NIEIR report -- who beat the IMF by three years in issuing their own warning -- are worrying that Australia’s 21-year streak of avoiding recession may come to an end.
The Wonder Down Under
Present concerns aside, Australia has an admirable economic record. Growth over the past four years has been uniquely strong, and not just because of China; foreign investments also helped prop up Australia’s currency.
An October report from the IMF found that the country’s projected 2012 GDP is about US$1.4 trillion, making it the world’s 12th largest. That’s even more impressive considering Australia’s population is only 22.5 million -- about the same as Madagascar or North Korea.
The IMF report also showed that Australia’s real GDP growth should surpass 3 percent this year, a figure unmatched by powerhouses like the United States or Germany. Unemployment is likely to stay below 5.3 percent. The national credit rating stands at an enviable AAA.
That stability came as some surprise since the Australian dollar, or Aussie, is a commodity currency. It relies heavily on revenues from the large-scale export of commodities, and is therefore prone to volatility -- especially since prices for those commodities have fallen steadily over the past few years. Following a spike of volatility this summer, prices are now stabilizing at a lower value than before the recession.
The disconnect between falling commodity prices and a still-healthy Australian currency can be largely attributed to foreign investment. The recession gave international investors good reason to diversify their assets at the expense of the dollar and the euro, making commodity currencies more appealing. The Aussie thereby gained strength against its American counterpart; today, the former still trumps the latter by a few cents.
This odd state of affairs -- lower commodity prices against a strong currency -- ultimately leaves employers in a lurch. NIEIR has shown that the service sector could face tough times in the near future, but that trend has already begun in big-commodity industries like fuel and metal, where lowered Chinese demand immediately exacerbated the pinch of a strong currency and resultant high costs.
Giant mining corporations like Xstrata PLC (XTA) and BHP Billiton (BHP) announced plans to cut down on Australian operations last month, slashing 600 and 297 jobs, respectively. Previous months saw similar shutdowns across a range of commodity-producing facilities, including an aluminum smelter run by Norsk Hydro ASA (NHY) and an oil refinery operated by Caltrex (CTX).
Commodities are still immensely important to the Australian economy, but these recent developments threaten an impending decline. The mining sector labor force is down more than 4,000 jobs since May, marking the first quarterly decline since 2009.
Boom and Busted
If the most dire predictions are correct and Australia’s mining boom is over, some experts are recommending a refocus on sectors like home construction or tourism in order to bolster the economy and prevent a recession.
But in terms of employment alone, the service sector holds the trump card. It employs a full 76.1 percent of the labor force, according to government figures, so any news of increased outsourcing in this sector is cause for concern.
NIEIR’s estimated annual offshoring of 20,000 of these jobs represents only a fraction of a percent of the overall services sector labor force. But the trend is significant because it matches predictions that were predicated on governmental inaction.
That outsourcing is progressing precisely as feared implies a serious lack of foresight.
“There is evidence that failure to deal with competitiveness of Australia’s services industries is impacting the government’s ambition to move toward being a knowledge-based economy and undermining the significant investment being made in education and training services,” according to the report.
The solution proposed by NIEIR is to implement a task force, reporting directly to Cabinet ministers, that would draw up a comprehensive strategy for beefing up the services sector. This would likely include amending the tax code to incentivize companies to keep jobs on domestic soil, as well as improving educational opportunities in order to carve a niche for Australia in highly specialized professional services.
Otherwise, said the report, “there is a danger facing Australia now that not only will we fail to take a role in the global market but that we will de-skill our workforce by moving key parts of the service sector off-shore.”
Unless leading politicians can engineer a quick U-turn, economic policies that leaned too heavily on China’s growth might come back to bite them in the Aussie.