Damon Mcknight
Australia faces a variety of risks, including economic, political, and environmental factors. Australia's economy is heavily dependent on trade with China, leaving it vulnerable to geopolitical tensions and commodity price fluctuations. High household debt, interest rates, and cost-of-living pressures have impacted consumer confidence and spending. Australia's proximity to Asia presents opportunities, but also exposes it to natural disasters and the impacts of climate change. Additionally, Australia's strategic alliances and military cooperation with countries like the US, India, and Japan, while beneficial, may also create geopolitical complexities with other nations.
| Characteristics | Values |
|---|---|
| Country Risk Ranking | The Australian Department of Home Affairs ranks countries in order of risk, from 1 to 3 (3 being the highest risk). |
| High-Risk Countries | India, Pakistan, Vietnam, Cambodia, Indonesia, China, Philippines, Nepal, most of the subcontinent, Africa, the Middle East, parts of Eastern Europe, and South America. |
| Current Account Balance | Positive since 2019, but a return to a current account deficit is expected in 2024, widening in 2025. |
| Economic Activity | Slowdown in economic activity in 2024, continuing into the first half of 2025, with an improvement expected in the latter half. |
| Labour Market | Labour market tensions are easing, with an unemployment rate of above 4% in 2024. |
| Household Consumption | Household consumption comprises half of Australia's GDP but has been lacklustre due to declining real wages and disposable income. |
| Business Environment | The business environment is stable and efficient, with low corporate default probability. |
| Political Situation | The political situation is good, with a federal parliamentary democracy and a Commonwealth realm. |
| Geographic Proximity | Australia is in close proximity to dynamic Asian economies and is a member of the Regional Comprehensive Economic Partnership (RCEP). |
| Trade Relations | Australia has strong trade relations with China, normalizing after tensions in early 2023. |
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What You'll Learn
Australia's dependence on trade with China
Australia and China have a "comprehensive strategic partnership" based on strong economic and trade complementarities, longstanding community links, and cultural links. China is Australia's largest two-way trading partner, accounting for 26% of its goods and services trade with the world in 2023-24. Two-way trade with China increased by 2.6% in 2023-24, totalling $325 billion. Australia's exports to China totalled $212.7 billion in 2023-24, with services exports up 42.3% in the same period. China is also a significant source of foreign investment in Australia, accounting for 4% of total foreign direct investment (FDI) in 2023.
The Australia-China economic relationship is extensive and growing, with resources and energy making up the largest share of Australia's exports to China, including iron ore, natural gas, and gold. As China's economy develops and the consumption habits of its rising middle class change, opportunities are opening up for a more diversified relationship, with a growing focus on premium agricultural exports and services such as finance, health and aged care, and professional services. Chinese investment in Australia has broadened from mainly mining to other sectors, including infrastructure and healthcare.
However, Australia's economic dependence on China has also led to challenges, as Australia must balance its economic interests with its own values and interests. Australia has raised concerns about human rights issues in China, banned Huawei from its 5G network, and debated allegations of Beijing interfering in domestic affairs. This has resulted in economic pushback from China, such as the 80% tariff imposed on Australian barley after Canberra called for an investigation into Covid-19's origins.
Despite attempts to diversify, Australia's economic dependence on China remains significant. Australia has set a goal of increasing exports to India, but economists argue that no other options come close to matching the volume of trade with China. The two countries have taken steps towards re-normalising trade relations and improving high-level dialogues, indicating a recognition of the mutual benefits of their economic relationship.
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High exposure to climate change
Australia is highly vulnerable to the impacts of climate change. As the driest inhabited continent, the country is already facing risks arising from its harsh climate, and climate change is exacerbating these risks and creating new ones. For example, the summer bushfires of 2019-2020, the three severe coral bleaching events within five years that caused a loss of over 50% of hard coral cover in the shallow waters of the Great Barrier Reef, and the record-high levels of global climate pollution in 2024 demonstrate the consequences of a warming planet for Australia's people, economy, and environment.
The incidence of extreme weather events, such as heatwaves, bushfires, storms, and coastal flooding, is expected to increase in frequency and intensity as the planet warms. These events pose significant risks to Australia's ecosystems, food production, cities and towns, and health and well-being. The Australian government recognizes these risks and is taking action to prepare for and mitigate the impacts.
One initiative is the development of Australia's first National Climate Risk Assessment and National Adaptation Plan. The National Climate Risk Assessment will identify and prioritize the things that Australians value most and are at risk of climate change impacts. It will provide an objective, evidence-based framework for decision-making and help government, industry, and communities conduct their own climate risk assessments and adaptation actions. The Risk Assessment will be completed over two years in 2023 and 2024, while the National Adaptation Plan will serve as a blueprint for responding to the identified climate risks.
In addition to government efforts, organizations like the Climate Council are also contributing to raising awareness about climate risks in Australia. They have developed an interactive Climate Risk Map that localizes climate change impacts across the country. The map allows users to explore extreme weather impacts under three different emissions scenarios and provides information on the potential damage risk to properties in specific areas. According to the Climate Council's report, "At Our Front Door," over 2 million homes and businesses are currently at high or moderate risk from worsening extreme weather driven by climate pollution.
To reduce the risks of dangerous and unpredictable outcomes, a substantial reduction in greenhouse gas emissions is necessary. Australia and other international governments have made commitments through the Paris Agreement to reduce emissions, but current policies are inadequate to meet these targets. It is crucial to plan for further mitigation strategies and prepare for the potential impacts of a warmer world on Australia's environment, society, and economy.
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High household debt
Australia's household debt is high compared to other countries, and there are several reasons for this. Firstly, higher real incomes in Australia increase households' willingness to take on debt. This is because higher incomes increase the ability to service that debt and may also increase the value of housing if supply is limited. This is reflected in the fact that rental properties in Australia are mostly owned by the household sector, whereas in other countries, a significant share of rental properties is owned by the government or corporate sectors.
Another factor contributing to Australia's high household debt is its urban structure. The coefficients on urban density imply that Australia's urban structure reduces the debt-to-income (DTI) ratio compared to other countries. Additionally, financial deregulation in the 1980s and 1990s improved access to credit for creditworthy households, allowing them to fund investments in housing stock. However, such changes have also been associated with excessive growth in debt, as seen in the increase in global DTI ratios over recent decades.
While Australia's high household debt may not necessarily indicate higher vulnerability to economic shocks, it is essential to consider the implications. The distribution of debt across households is crucial in understanding the potential risks to banks and consumer spending. High household debt in Australia is more likely to result in a significant decrease in consumer spending than in bank failures.
Furthermore, it is worth noting that Australia's closest neighbours, including Papua New Guinea, New Zealand, East Timor, Indonesia, and others, may have similar and unique natural and human characteristics that could influence economic conditions in the region. Overall, while there are various factors contributing to Australia's high household debt, the implications for vulnerability are nuanced and depend on a range of economic and structural factors.
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Rising defence costs
Australia's defence budget is facing pressure from multiple fronts, with a deteriorating geopolitical context, rising costs of living, and the need to invest in modern military capabilities.
The Australian government faces a challenging geopolitical environment, characterised by the rise of aggressive authoritarian powers, global conflicts, terrorism, foreign interference, and the normalisation of cyberwarfare. The country's largest trading partner, China, is increasingly assertive militarily and has growing control of critical technologies. This has resulted in a rearmament push in the Indo-Pacific region, with Australia also seeking to enhance its military capabilities.
However, Australia's defence budget has not kept pace with the growing strategic challenges. While the budget has seen nominal growth, with a 7.4% increase in consolidated defence funding in 2022, resulting in a total of $48.6 billion, the impact of inflation must be considered. With inflation estimated at 5%, the real growth figure is expected to be lower, affecting the defence sector's buying power.
The Australian Strategic Policy Institute (ASPI) has criticised the government's slow progress in strengthening the Australian Defence Force's (ADF) ability to respond to potential conflicts in the next decade. Most of the major new capabilities outlined in the government's defence investment blueprint are decades away from being fully fielded. While there are some short-term enhancements, they will not be available until the 2030s, leaving Australia vulnerable in the immediate future.
Additionally, there is a concern that the government is overly focused on future equipment acquisitions rather than the preparedness of the current force. The ADF may not be adequately equipped to deter adversaries from attempting military domination in the region. Australia's defence industry is also facing the challenges associated with megaprojects, which involve significant spending and long development times, with the Attack-class submarine program costing over $4 billion without delivering any tangible results thus far.
To address these issues, Australia needs to increase defence spending immediately. This involves balancing investments in long-term capabilities with enhancing existing forces to meet near-term threats. Australia should also focus on integrating modern developments in warfare, such as drones, AI, robotics, and electronic warfare, into its traditional large platforms like submarines and warships.
The rising defence costs are part of a broader context of fiscal pressures in Australia, including falling global prices for commodity exports, an ageing population, climate change, and heavy reliance on tax revenues. These factors have contributed to a widening fiscal deficit, projected to reach -2.0% in 2025.
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A tight election in 2025
Australia is a federal parliamentary democracy and Commonwealth realm, with a bicameral federal parliament consisting of the Senate and the House of Representatives. In 2025, the centre-left Labor government led by Prime Minister Anthony Albanese holds a slim majority in the House of Representatives, with 51.7% of the seats, and 32.9% in the Senate. With a tight election expected in 2025, the Labor government's majority could be at risk.
The country has a strong business environment, with a regulatory and legal framework that is business-friendly, low levels of corruption, and strong scores for property rights, judicial effectiveness, and government integrity. Australia has proven to be an appealing and profitable market for American companies, with a familiar legal and corporate framework and a sophisticated business culture. The country has a positive current account, driven by a trade surplus and strong growth in commodity exports. However, this surplus is expected to decrease in 2025, with lower prices for resource commodities, particularly coal, and weaker external demand.
There are several risks and challenges facing Australia in the coming years, which could impact the outcome of the 2025 election. Firstly, the country has a heavy reliance on tax revenues, and falling global prices for commodity exports could lead to a widening fiscal deficit. Australia also has high exposure to climate change and natural hazards, and its trade dependence on China poses a medium-term risk, particularly in the context of a potentially deteriorating geopolitical relationship. Additionally, Australia faces high levels of household debt, a slowdown in economic activity, and labour market tensions, all of which could impact consumer confidence and spending.
In the lead-up to the 2025 election, the government will need to address these challenges and demonstrate effective management of the economy and international relations. The outcome of the election will depend on the success of these efforts and the confidence of the Australian people in their government's ability to navigate these risks. The election is expected to be closely contested, and the future of Australia's political landscape hangs in the balance.
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Frequently asked questions
Australia is not a continent, but a country that is part of the continent Oceania. However, there are certain countries that pose a risk to Australia. Firstly, China, as Australia's trade dependence on China poses a medium-term risk in the face of a potentially deteriorating geopolitical context. Secondly, the United States, as Australia's security agreement with the U.S. seeks to counter Chinese expansionism in the Indo-Pacific region, which could escalate tensions. Lastly, countries on the Country Action List (CAL) pose a biosecurity risk to Australia, as they are considered high-risk pathways for pests and contaminants.
The Country Action List (CAL) is a list of countries and ports identified as having high levels of contamination or high-risk pests. Cargo from these countries is subject to heightened biosecurity measures and mandatory inspection on arrival in Australia. The list includes countries such as Indonesia and Papua New Guinea, which are geographically close to Australia.
Australia is facing a range of risks, including an aging population, climate change, high household debt, and elevated interest rates. Additionally, there is a risk of a widening fiscal deficit due to falling global prices for commodity exports, rising defense costs, and increased healthcare and welfare spending. Australia's business environment is also facing challenges, with slowing economic activity and lacklustre household consumption.
