The first day of the CPA Australia Not-for-Profit Conference was held in Brisbane today and I gave a presentation on the economic outlook and the collaborative economy that I gave in Sydney and Melbourne last week. My slides are available to download, and my speaking notes, which broadly reflect the speech I delivered, are provided below.
Australia’s economic outlook, disruption and the collaborative economy: What it all means for NFPs
Introduction
US President Harry Truman once asked for a one-armed economist, because he was sick of economists telling him “on the one hand this, on the other hand that.” I am sorry but I have to say that, on the one hand, Australia’s economic outlook is reasonably encouraging, and we have reason to be excited about the opportunities created by disruptive technology. But, on the other hand, there are profound risks to the global and domestic outlooks. The UK Chancellor of the Exchequer George Osborne was right earlier this year when he referred to a “dangerous cocktail” of economic risks in the global economy.
This is an important year for Australia, with a looming federal election. Commentators have recently expressed concern about the lack of a clear narrative from the Federal Government, particularly around the economy. And expectations have fallen regarding what the Government might deliver via a tax reform package. Maybe there will be some modest income tax cuts, and some tweaks to negative gearing and super tax concessions, but there probably won’t be much else.
The alleged lack of a narrative is concerning to many because the economy has endured some strong headwinds, with the end of the mining boom having a major adverse impact, although, to an extent, it was expected.
So today I will provide an overview of the economic outlook. And, in this election year, it is also important to consider issues relevant to innovation, a policy area for which the Government has a much better narrative. We will consider the rise of the collaborative or sharing economy, which has the potential to profoundly transform the economy, for many sectors, including for NFPs.
Economic outlook
The Australian economy has been growing at a reasonable but unspectacular rate in recent times. The latest National Accounts data printed by the ABS two weeks ago showed GDP growth through-the-year of 3 per cent, meaning the economy is still growing slightly below the expected average or trend growth rate between 3 and 3½ per cent. Over the last two years, growth has averaged around 2½ per cent.
[SLIDE: GDP GROWTH]
Also, because the world is paying us less for much of the stuff we produce and export—iron ore and coal, in particular—our real income has been growing much slower and has shrunk in some quarters. Thankfully there has been some recovery in the iron ore price recently, but it remains to be seen whether that is sustainable given underlying supply and demand.
So, with slightly below average growth in GDP and indeed a decline in real income in recent quarters, it’s unsurprising the sharemarket hasn’t been strong.
[SLIDE: S&P/ASX 200] (Note the chart contains end-of-month values, and the S&P/ASX 200 index is currently around 5,100).
What has been confusing to some analysts is that jobs growth has been reasonably strong, despite below average economic growth, leading some analysts to question the reliability of the ABS Labour Force data.
[SLIDE: EMPLOYMENT GROWTH]
As more people have entered the labour force looking for work, the unemployment rate has remained around 6 per cent even though reported jobs growth is so strong.
[SLIDE: UNEMPLOYMENT RATE]
Australia’s economy has endured the end of the mining boom relatively well due to a looser monetary policy and the depreciation of the Australian currency, which is stimulating important export industries such as tourism and international education (as well as some import-competing industries).
[SLIDE: EXCHANGE RATE]
Tourism, particularly from China, is one of the bright spots in our economy and is helping revive tourism-dependent regional economies such as Far North Queensland and the Gold Coast.
[SLIDE: INTERNATIONAL VISITOR NUMBERS]
I mentioned before the role of monetary policy and clearly the record low overnight cash rate of 2 per cent—which flows through to other interest rates, including mortgage interest rates—has been important in stimulating residential property investment, although it appears it is yet to stimulate business investment.
Indeed the RBA has previously complained businesses have not revised their hurdle rates—the minimum rate of return (e.g. 10-15 per cent) that an investment project needs to earn before it is funded—despite much lower borrowing costs.
Unlike in some other advanced economies, there is scope to cut interest rates further in Australia, should the RBA need to support the economy further. It does not need to worry too much about inflation, which appears contained. Recall the RBA has an inflation target of 2 to 3 per cent per annum over the business cycle.
[SLIDE: INFLATION]
Regarding whether another interest rate cut is likely, all depends on how the economy evolves over the rest of the year. The outlook is still beset by a high degree of uncertainty. Businesses at least expect the economy to improve over the year, but I would suggest this positive sentiment could change quickly depending on events.
[SLIDE: NAB SURVEY RESULTS]
Major issues in the global economy
The domestic outlook will be affected by the global outlook, and there are significant risks to this outlook.
[SLIDE: MAJOR ISSUES]
Globally the major issues include:
- the low oil price;
- anxiety over China and the US recovery; and
- unconventional monetary policy, including negative interest rates in economies accounting for around one-quarter of global GDP (i.e. the EU and Japan).
As is well known, China is slowing. And recent industrial production data are discouraging, with the weakest growth since the financial crisis in the first two months of the year (although this may have been affected by the timing of Chinese New Year, a factor noted in the minutes of the last RBA Board meeting).
[SLIDE: CHINA’S GDP GROWTH]
This slowing has already impacted our economy through the impact on our resources sector. There are further concerns over the stability of its financial system. China’s financial system certainly is troubled, with a large build-up of debt, particularly by state-owned enterprises.
[SLIDE: CHINESE FINANCIAL SYSTEM]
But, fingers crossed, China has time to resolve its issues and the power of its central government should help with that resolution. My fellow Economic Society of Australia (QLD branch) committee member Michael Knox, Chief Economist at Morgans, has likened the situation in China’s financial system to a time bomb, but one which is on a countdown of five years, meaning there is time to sort things out.
The Chinese economy has not been helped by a relatively slow recovery in the US, with a somewhat discouraging result in the fourth quarter of last year of annualised growth of 1 per cent per annum.
[SLIDE: US GDP GROWTH]
Time will tell whether Janet Yellen, Federal Reserve Chair, was right to raise US interest rates at the end of 2016. Further increases may not come as soon as once expected. This is especially the case give recent weak retail sales data.
Another important feature of the current global economy is the very low oil price, which remains relatively low despite the (northern hemisphere) Spring rally in the price recently. The low oil price is supporting oil-importing economies, through freeing up money for other expenditures.
[SLIDE: OIL PRICE]
However, in the oil-exporting states, such as Saudi Arabia, it is causing economic and budgetary distress. This is a major geopolitical risk. An editorial in the Guardian newspaper in January wisely observed:
“…the geopolitical consequences of falling prices are myriad and unpredictable.”
The other key feature of the global economy at the moment is the extraordinarily unconventional monetary policy we have seen, particularly quantitative easing and now negative interest rates in Japan and the Eurozone.
[SLIDE: POLICY RATES]
Quantitative easing or QE, the injection of newly created money into economies by central banks purchasing bonds and other assets from the private sector with a view to lowering borrowing costs, was once considered radical.
But QE did not have as large an impact as central bankers desired, so now the European Central Bank and the Bank of Japan (Japan’s central bank) are experimenting with negative interest rates on some of the funds that commercial banks deposit with them. These central banks once paid an interest rate on monies that had been deposited with them, but now they are charging a small fee for keeping the money, meaning there is a negative interest rate, in an effort to encourage banks to lend more money out.
The radical policy of negative interest rates has only been considered because of the perceived failure of conventional and previous unconventional policy measures. The Economist magazine nicely characterised the current situation with its recent cover, highlighting the bewilderment and powerlessness of macroeconomic policy makers.
[SLIDE: WORLD ECONOMY OUT OF AMMO]
Indeed, the situation of so-called secular stagnation, caused by prolonged deleveraging and balance sheet repair, particularly in the EU and Japan, appears so desperate to some that they are calling for more desperate measures.
[SLIDE: HELICOPTER DROP]
One suggestion is a so-called helicopter drop of money, by which central banks would directly fund government expenditures such as pensions and salary payments by printing new money. Printing money to pay the bills, or monetising deficits, historically was a recipe for very high inflation or hyperinflation.
To summarise, we live in extraordinary economic times and should not expect a strong global economy any time soon. So, while Australia might experience moderate growth, it will be difficult to do much better than this given the global economic outlook, and indeed there are substantial downside risks as discussed.
Disruption and the collaborative economy
At the same time as many economies across the world are sluggish, even within those economies certain sectors are dynamic and being transformed by technology that is enabling new disruptive business models, such as Uber and Airbnb. These are just the most prominent examples and there are many more.
[SLIDE: DISRUPTIVE COMPANIES]
Digital platforms are transforming a range of industries, including:
- Transport: e.g. Uber;
- Accommodation: e.g. Airbnb;
- Finance: e.g. Nimble; and
- Professional services: e.g. Freelancer.
Many of these businesses are described as being part of the collaborative or sharing economy. The collaborative and sharing economies offer huge opportunities for NFPs. Rachel Botsman, the worldwide authority on the collaborative and sharing economies, defines the collaborative economy as [SLIDE ON COLLABORATIVE ECONOMY]:
“Distributed networks of connected individuals & communities…transforming how we produce, consume, finance, and learn…”
This is a broad definition which encompasses the sharing economy, which she defines as:
“Sharing under-utilised assets from spaces, to skills to stuff…for monetary or non-monetary benefits.”
Let us simply refer to the collaborative economy from now on. As mentioned, digital platforms offers huge potential for NFPs to become part of the collaborative economy due to the potential to connect motivated individuals and to take advantage of under-utilised resources, including people and assets.
The collaborative economy is still in its early stages in Australia. Obviously we have Uber and Airbnb and some other businesses, but there appears to be a lag of a few years before collaborative economy businesses come to Australia, so we are behind the growth that is occurring overseas, particularly in the US.
The collaborative economy clearly has much room to grow in Australia. Deloitte has estimated that, in 2015, the collaborative economy contributed around $½ billion to the NSW economy (note the total NSW economy is around $500 billion), and that many thousands of people were making money from it.
[SLIDE: DELOITTE ESTIMATES]
The collaborative economy is part of a set of inter-related mega-trends that are affecting economies and societies around the world.
[SLIDE: MEGA-TRENDS]
These mega-trends include:
- the internet of things: the connectivity of everything in our homes, workplaces and built environment, so our appliances are talking to each other and relevant business devices, so, for example, our fridge will order new milk from the supermarket when we run out;
- big data: the data held by companies and governments on all of us, on businesses, on the environment including on our flora and fauna, for example, which is currently vastly under-utilised; and
- Robotics and autonomous vehicles: which will reduce the need for human manual labour, freeing people up for more valuable work or leisure.
All these trends offer opportunities for collaborative economy business models. For example, autonomous vehicles could easily fit into Uber’s fleet of drivers, similar to how autonomous cars were driven by robots in Total Recall.
To give another example, the analysis of big data can be crowd sourced, by offering prize money for the best algorithm that makes predictions based on the relevant data, as is done through Kaggle competitions.
Kaggle was founded by a Generation Y Australian Treasury colleague of mine Anthony Goldbloom. Due to a lack of venture capital funding in Australia, Anthony moved to Silicon Valley five years ago and his company is now thriving, having received an initial $10 million in venture capital.
Kaggle has run big data analysis competitions for many of the world’s largest companies, including GE and Facebook. And it has assisted government agencies and NFPs, too. For example [SLIDE: KAGGLE]:
- the US National Oceanographic and Atmospheric Administration has crowd-sourced the development of an algorithm to identify North Atlantic Right Whales in photographic images; and
- the California Health Care Foundation has sponsored a competition to develop an automated method of screening for diabetic retinopathy, the leading cause of blindness for working age people in developed economies.
Kaggle offers the opportunity for NFPs with important problems and data they are happy to share to get some of the brightest data scientists on the planet competing to come up with the best algorithm to predict whatever it is they are interested in predicting. The prizes you need to offer may not be as large as you would expect to have to offer to get so many people working on your problem. For example, a $100,000 prize pool, shared among 1st, 2nd and 3rd place, from the California Health Care Foundation, inspired 661 teams to attempt to develop an algorithm over a six month period.
There are some exciting Australian developments in the collaborative economy that are relevant to NFPs that I would now like to touch on.
[SLIDE: AUSTRALIAN EXAMPLES]
Lately in Australia, much has been made of social enterprises, for-profit businesses partly motivated by a social conscience, and there are incubators such as Peter Ball’s Impact Academy in Brisbane which are doing great work with social enterprises.
The NDIS offers huge opportunities for social enterprises in the collaborative economy, owing to the choice of service provider now being in the hands of people with a disability. It is not hard to imagine an Uber-like app for disability services emerging.
The collaborative economy offers opportunities for NFPs as well as social enterprises. Broadly speaking, there are a rising number of NFPs looking at innovative business models. For example, Mission Australia has participated in a social benefit bond with the NSW Government, whereby it would be paid out of the long-term budgetary benefit of reducing recidivism among offenders taking part in the program.
As another example, consider ProBonoEconos, a pro bono economic consulting and data analysis service, which taking advantage of the ability to coordinate over the internet has established branches across Australia and now internationally, expanding rapidly from the original branch in QUT a couple of years ago. This is a service that NFPs could take advantage of if they are trying to prove a case for funding to governments—e.g. by demonstrating the economic benefits of their programs.
Australian digital economy expert Monica Bradley suggested to me that to see collaborative economy opportunities you should apply an “Uber lens” to any important problem you have. Look for under-utilised assets that can help address important needs and figure out how to make the necessary connections.
A good example of applying an Uber lens to a problem and coming up with a collaborative economy-type solution is CheckUP, headquartered in South Brisbane, which is tackling Aboriginal and Torres Strait Islander health problems through leveraging local resources and partnerships, including local health services, the Royal Flying Doctor Service and the Indigenous Diabetes Eyes and Screening Van (IDEAS Van), among others. One of their most recent initiatives resulted in more than 60 people in South West Queensland receiving life-changing cataract surgery. Local and visiting health services and a range of community resources were harnessed to ensure that these people could receive their surgery much closer to home and without having to endure a lengthy wait-time – this has had a dramatic impact on their overall health and wellbeing. Using a similar approach, the surgery initiative will now be expanded to other parts of rural and regional Queensland.
This example should illustrate that you may be able to solve a range of important problems by seeing them through an Uber lens. For example, how about an Uber-type app to find swags or beds for homeless people?
Think about where there are under-utilised assets, and think laterally. For example, mobile phone data allowances (e.g. 12 gigs per month) are often not fully used up, and could be shared with homeless people via a digital platform facilitating this “piggybacking.” The homeless often have mobile phones but frequently run out of data and cannot afford to buy new data.
Here is a suggested process for developing a collaborative economy model for NFPs [SLIDE: PROCESS]:
- Ask what is the problem?
- Find the gaps—i.e. under-utilised assets;
- Identify the supply chain;
- Identify what funding will do (to make the case to government and investors); and
- Identify outcomes that can be measured.
Conclusion
As I hope you can appreciate, the collaborative economy offers huge opportunities for NFPs and it is important to take advantage of these opportunities in what, owing to our economic circumstances, and the budgetary situations of our governments, may otherwise be an age of diminished expectations, to borrow a phrase from Paul Krugman.
[SLIDE: BENEFITS TO NFPS]
The benefits from larger scale, new resources, lower costs and new services should excite you all, and have you considering how you can look at your problem through a new lens, and develop new business models for the collaborative economy. Thank you.
Queensland Economy Watch 