what's over the horizon building the lucky country

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What’s over the horizon? 550,000 fewer jobs? Or too much fear?

12 April 2017: What if China’s rise is temporarily ‘trumped’? Would that tip Australia into recession, sending unemployment soaring and house prices plunging?

Yes, it could. Let’s be clear – bad stuff can happen. But fear of the future is corrosive. The answer to rising uncertainty doesn’t lie in pretending the future won’t be disrupted. Chances are it will. Rather, the answer lies in shedding as much light as we can on the darkness cast by uncertainty.

Don’t be scared. Be prepared

‘China stumbles’ is just one of the three potential scenarios detailed in Deloitte’s latest Building the Lucky Country series report. What’s over the horizon? Recognising opportunity in uncertainty urges us to be less fearful in the face of uncertainty and to actively scan possible paths for the future.

As Cindy Hook, Deloitte Australia CEO noted: “Taking the time to scan the horizon is among the most valuable investments that businesses, governments and families can make. As business leaders and as a nation, we owe it to ourselves to think through plausible ‘what ifs’ and weigh up what they might mean.”

Report author and Deloitte Access Economics partner, Chris Richardson said: “Rising uncertainty has left us increasingly choosing caution over courage. Yet that means we’re missing opportunities: even ‘bad’ futures aren’t nearly as bad as you might think, and there are a bunch of ‘good’ futures out there, too.”

Deloitte Chief Strategy Officer and report author John Meacock said: “What’s over the Horizon? will help business leaders shine a light on uncertainty and turn it to their advantage. Understanding the impact of ‘what ifs’ on their industry and business is essential. What’s over the Horizon? provides an opportunity to scenario plan using better information and tools to prepare for the future.”

What’s over the horizon? uses the new Deloitte Horizon model to explore three plausible paths for Australia’s future:

  • What would happen if troubles in China sent Australia lurching into recession?
  • What would Australia look like if we successfully slipstream Asia’s new booms?
  • Or what would Australia look like if we get better at being ‘cyber smart’?

To be clear, none of these three scenarios is the ‘most likely’ outcome for Australia. But they’re all plausible. And unless decision-makers in Australia and around the world start to make a better fist of assessing risks and opportunities, it is likely that our future will underperform its potential.

Scenario 1: What if China tips Australia into a recession – hitting our housing?

Australia’s gains from our relationship with China have been huge, but equally our dependence on China is also huge, and our vulnerability on that front has risen significantly over the past decade.

“2017 brings with it a large fault line between China as our key economic partner and the US as our key ally,” said Richardson.

And a bunch of warning signs are flashing amber:

  • China has built too much, and relied too much on debt in doing so,
  • It is still taking on debt at a rapid pace, which worsens its vulnerabilities, and
  • Its leadership has kept using stimulus, delaying but worsening the eventual adjustment.

“Australia doesn’t have the defences we had back in 2008 and 2009 – we lack firepower in interest rates and the Budget. And unlike what happened in the GFC, China would be part of the problem rather than part of the solution. So this scenario would bring a recession here, and also hit housing,” said Richardson.

Potential consequences for Australia (by 2019-20)

  • House prices would be 9% lower, knocking $600 billion off the wealth of Australian families
  • The share market would be down by 17%, wiping out a further $300 billion of our wealth
  • Families, businesses and governments would earn almost $140 billion (7%) less than otherwise
  • More than half a million fewer people with a job, with some 200,000 jobs lost in the construction industry alone, and more than a quarter of the jobs in mining lost
  • Profits for the average business down 19%, sales down 8%, business investment would halve
  • The $A would drop 15 cents against the $US.
China stumbles scenario – extent to which construction output differs from baseline (%)

Scenario 2: What if Australia successfully surfs Asia’s third wave?

The best and brightest future for Australia is essentially ’more of the same’ as we ride Asia’s boom to a better future, and as we have the courage to adopt much needed economic reforms.

“Much of Australia’s past success has come thanks to surfing a set of waves – a mining boom, a wool boom, a gold boom, and others. In many ways this scenario is simply asking for history to repeat itself. But it would be history on steroids,” said Richardson. “The siren call of the populists currently dominating the global electoral landscape would have to be defeated. Politicians would have to act with courage and determination to deliver reforms, both in Asia and here at home.

“But, if achieved, the maturing boom in Asia would see the region’s rising middle class consumers power a new set of opportunities for our nation, generating a range of potential growth sectors.”

This is a big scenario, but its effects would be slow to build. The report models the dividend from ‘success’ on the global and domestic stages across two full decades, building on the sector specific findings of Deloitte’s 2013 Building the Lucky Country report, Positioning for prosperity? Catching the Next Wave.

Potential consequences for Australia (by 2030):

  • The economy is 2.5% larger and produces an extra $650 billion across the next twenty years
  • More than $800 billion is added to national income across that same two decade horizon
  • That bigger pie is shared: wages lift by 1.8% more than prices, and there’s 1.6% more jobs
  • A lift in profits and prospects encourages businesses to invest 5.7% more in future capacity
  • But that success also comes with costs attached, including a stronger $A (up by 1.3%) and higher interest rates (up by 0.7 percentage points).
Asian century scenario - change in key macro variables in 2030

Scenario 3: What if Australia goes cyber smart – and invests with confidence?

Digital opportunities and cyber risk go hand in hand. We live in an increasingly digitised world, but the enormous benefits generated by that also bring cyber risks. This means the very technologies with the greatest potential to turbocharge our future prosperity are those that we are often less willing to pursue.

Richardson said: “Cyber risk – and our responses to it – epitomise the point we’re making in this report. Uncertainty generates corrosive costs, but this scenario sees Australian businesses, organisations and families better address cyber risk, thereby freeing themselves up to invest with greater confidence.”

Potential consequences for Australia (by 2030):

  • 5.5% increase in investment by businesses in future productive capacity
  • An extra 60,000 people employed, with a stronger exchange rate (almost 4% higher)
  • IT, computer systems, internet services, telecommunications among biggest winners.
Cyber scenario - change in key macro variables in two decades

About Deloitte Horizon

Horizon marks a first – Deloitte has ‘industrialised’ strategic scenario analysis, providing a range of scenarios for the future, covering economic, technological and regulatory outcomes, and flowing those through to detailed views across each of 56 industries and eight states and territories.

About Building the Lucky Country

Deloitte’s Building the Lucky Country series was launched in 2011 and has been developed to prompt debate and conversations across business and government on issues facing the Australian economy. The five previous reports are:

  • The purpose of place: reconsidered (2015)
    As Australia transitions to a knowledge-based service economy, and looks to deliver a prosperous future for its people, unlocking the potential of the nation’s places needs to be reconsidered.
  • Digital disruption: Short fuse, big bang (2012)
    Australia’s business and government leaders don’t need to look far into the future to see the new wave of digital disruption headed towards them. It is already here.
  • Where is your next worker (2011)
    Australia's problem in coming years won’t be a lack of jobs – it will be a lack of workers...

Find out more and register now to receive your copy of the latest Building the Lucky Country series report, What’s over the horizon? Recognising opportunity in uncertainty.

 

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