Extinction is a crisis

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Yesterday Deutsche Bank released a new report into Dutch disease and it makes fascinating reading. The report more or less follows the line put forth by the Canberra boffins, that manufacturing has been in long term decline and offers some quite useful charts. The report concludes the following (with comments):

Manufacturing is in long-term decline, but not in crisis
With job losses announced during reporting season, ongoing pressure from labourand other input costs and the high exchange rate, there is a growing sense ofcrisis in the Australian manufacturing sector. While the share of output and employment from manufacturing has fallen steadily in Australia and other advanced economies in favour of services, the market capitalisation and share prices of major listed Australian manufacturers have tracked the market over the last 5 years.

God knows how the analysts reached the conclusion that there’s no crisis. The following is their own chart:

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By Deutsche’s reasoning, the crisis will never come. The best we can hope for is a quiet click as last manufacturer closes the door and leaves the building. Apparently there’s no crisis in the job losses either:

Cuts to ~2,300 manufacturing sector jobs announced

A number of major manufacturers announced job cuts in the recent reporting season, including BlueScope Steel (1000), OneSteel (400) and Coca-Cola Amatil(150). Job losses are clearly difficult for families and local communities, especially where the reductions are highly concentrated geographically. But such reductions are small in the context of total Australian employment of 11.5 million in July and monthly employment growth averaging ~18,000 jobs over the last decade.

No, they don’t sound like so many. Except these are only the listed manufacturers. If you want to make the claim that there’s no crisis then please compare the job losses with the overall Australian based employment of these firms. Then give us a proportion we might extrapolate to manufacturing more generally. The next conclusion, in case you missed it, is that manufacturing is in a long term structural decline:

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Manufacturing is in multi-decade decline in advanced economies

As demand for services has risen, the employment and output shares ofmanufacturing have been declining over decades in Australia and other advancedeconomies. The growing manufacturing output of leading developing countriesreflects their increasing industrialisation and lower labour costs.

But again, the analysts own charts belie their findings. Here’s one where they compare manufacturing as a percentage of output across developed countries:

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One wonders why the Australia line finishes in 2007. As the chart above shows, share of output continues to fall below that of Norway to somewhere above 8%. I guess it’s because having the lowest output to GDP ratio of every developed economy is not a crisis either. Then we get into the usual suspects:

Australian employment growth has favoured the resource states

Employment growth is strongly favouring the resource states of Western Australiaand Queensland, consistent with the Gregory thesis (named for ANU economist Bob Gregory) that strong growth in minerals exports would adversely affectimport-competing sectors through relative price changes and a higher exchange rate.

Yada, yada, yada. Then it’s onto some bold conclusions:

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This is what structural change looks like

While the shift in the structure of the Australian economy is unlikely to reversesoon, not all manufacturing industries will be adversely affected, and competitive manufacturers with low cost bases will remain profitable. With increasing incomesin developing countries, demand for high-end manufactures is likely to grow.

Australian listed manufacturers have tracked the market

Despite the manufacturing sector’s falling share of employment and output, as agroup, the market capitalisation and share prices of listed manufacturersBlueScope Steel, OneSteel, Boral, CSR, Fosters, Coca-Cola Amatil and GoodmanFielder have tracked the ASX200 over the last five years, though with marked volatility around the trend.

See above discussion. And finally, it wasn’t a crisis for the Dutch either:

Wrong diagnosis?

Behind the original diagnosis of Dutch disease in the 1970s was the concern thatby the time the Netherlands’ natural gas resource was depleted, its manufacturingexporters would have lost capital and skills, and non-gas exports would notrecover after gas exports fell. But Dutch manufacturing exports recovered stronglyafter gas exports declined in the mid-1980s, suggesting that the manufacturers that remained were highly competitive. There is evidence that with a flexible economy, advanced countries can reverse a temporary structural adjustment.

The key being the phrase, “the manufacturers that remained”, which according to Deutsche boys own charts, even at the height of the Dutch disease episode, was still above 20% of GDP:

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Which is still considerable and obviously better able to retain the skills, IP and capital equipment to expand when the time came, as opposed to Australia’s 8% and falling.

And when did the considerable manufacturing base left behind turn around? Precisely when the currency collapsed:

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Kudos to Deutsche Bank for doing this research (seriously).

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.