Australia’s terrific distance

The conflict in the Middle East is the most recent crisis corrosive to hope the world might return to a state we recognise. But we should acknowledge the Australian economy’s ability to weather global disturbances, and the opportunities being presented.

Forty years ago Australia was warned of the dangers of becoming a ‘banana republic’. Rather than an unstable, single-export oddity, the Australia of today runs a trade surplus and the lowest stock of net foreign liabilities since 1983, has a lauded superannuation system, and is the world’s fourth most desirable migration destination.

The Australian economy finished 2025 growing at its fastest rate in two years, and the global economy mirrored 2024’s 3.3 per cent outcome. In fact, 2025 was the world’s fourth consecutive year of three-point-something growth.

The data so far suggest only a modest impact from the conflict. Sentiment has fallen, but measures of business conditions and spending are resilient.

Even in Asia, the most oil-dependent region, most purchasing managers’ indexes were above the 50 break-even level in April. Strong private-sector balance sheets outside China are ensuring stresses remain localised.

As one example, available US dollar liquidity in money market funds has reached $US8 trillion, double the pre-global financial crisis peak. The problems that manifest mean less in the absence of direct exposure.

The much vaunted ‘cockroaching’ of private credit is another example. The Bloomberg index of Business Development Companies (a proxy for private credit) fell as much as 24 per cent in the last six months, yet there have been few signs of contagion.

Legitimate concerns

Global fiscal concerns have grown. The global easing cycle of 2024 and 2025 was, unusually, not accompanied by lower long-term bond yields. Unsustainable fiscal positions in the UK, France, Japan and the US are all legitimate concerns.

Australian bond yields typically trade closely with the US market. The strong correlation is welcome when the US Treasury yield is the global benchmark for liquidity and soundness, but less so when that is at risk.

Australia is likely to increasingly trade on its own merits rather than as a US satellite. The International Monetary Fund pegs general government net debt in Australia at 32.5 per cent of gross domestic product in 2025. Only a handful of economies are in a better position, and the Group of Twenty average is a distant 90 per cent.

The Australian corporate bond market last year eclipsed the sterling and Canadian dollar markets in issuance volumes. For the first time, Australia has the third most active market in the world.

Many countries, including Australia, have been adjusting their defence and industry policy stances. While both can be at the expense of other activity, they also represent insurance against future need.

They additionally form part of the opportunity set. In Australia, defence spending is projected to more than double over the next decade, and critical minerals are a priority industry under the Future Made in Australia framework.

Reconsidering

Industry policy can be derided as ‘picking winners’. But in Asia, the world’s fastest-growing region, it was never a fashion. It is advanced economies that went cold on the idea but are now rewarming.

The orthodoxy is also reconsidering its position. The World Bank published the influential East Asian Miracle in 1993 and argued Asia’s experience with industry policy was unlikely to be replicable. Last month its Chief Economist, Indermit Gill, suggested “that advice has not aged well – it has the practical value of a floppy disk today”.

Tariffs and national resilience demands are conspiring with longer-lived influences to challenge productivity. Despite the productivity promise of AI, surveys show Australians are more nervous than excited.

Much of the research, including from Jobs and Skills Australia, is finding artificial intelligence will be a tool that complements rather than replaces human endeavour. Research from AlphaBeta nearly a decade ago found the occupations that incorporated technology most effectively were less susceptible to being replaced by it.

Slower productivity and a pickup in growth are also feeding recalcitrant inflation. Australia has been the first to raise interest rates after the recent easing cycle, with softer housing and consumption this year the likely consequence.

But Australia’s productivity performance has been constrained by headwinds likely to fade with time. The lost decade of business investment before 2020 has seen Australia’s capital-to-labour ratio trend sideways for the first time in at least forty years. More capital is the source of most productivity growth.

The Middle East conflict suggests for the first time Australia’s geographic location — both far enough away and close enough — can be considered a strength. Sixty years ago, Geoffrey Blainey described Australia as subject to the ‘tyranny of distance’. In today’s world, being at the centre may be the bigger challenge.

Australia remains near the fastest growing hemisphere, and its expanded suite of submarine cables ensures connectivity. But its distance also offers some terrific advantages. The straits — Hormuz, Malacca and Taiwan — can all be avoided.

Australia’s main challenges are more distributional than absolute. Providing young people with a sense of achievable possibility, alongside housing and aged care, are pressing. But these are also challenges in many other economies with an inferior ability to generate the income to pay for them.

Some aspects of the environment are unquestionably more uncertain. But the obverse of the uncertainty coin is opportunity. A front-footed Australia is better placed to manage the changes and grasp what is on offer.

Richard Yetsenga is Chief Economist & Head of Research at ANZ