Bill Evans dissects the Australian economy

By Leith van Onselen

Above is an interesting extended interview with Westpac’s chief economist, Bill Evans, aired last night on ABC’s The Business. In the interview, Evans provides his views on the post-mining boom economy, including his outlook for interest rates, the currency, and house prices. Key points include:

  • June’s capital expenditure (capex) data was disappointing. Expected mining capex fell sigificantly, whereas there was surprisingly no pick-up in non-mining capex.
  • Business confidence remains fragile. While a new stable government should help at the margin, the high currency is having a significant adverse impact. The currency needs to fall to around $US0.70.
  • Consumer confidence has held-up better, due largely to the reduction in interest rates, which has improved cashflow and views about their finances. However, they remain concerned about employment, which is related to the low level of business confidence.
  • Interest rates will continue to fall in order to help economy via: improved cashflow, increased consumer spending, and downward pressure on the currency.
  • House price inflation will continue, which will help the economy via the wealth effect. However, it won’t get out of control, as consumers will remain cautious overall. Rising house prices will also be required to boost dwelling construction.
  • Aggressive fiscal tightening is not warranted, given the economy remains fragile. Australia has low public debt, so some further increase is not a problem.
  • With the economy facing stiff structural headwinds as households deleverage and the mining capex boom unwinds, Evans wants to see the government significantly boost infrastructure investment, which he sees “as the next big story for the Australian economy…[needed to]…boost productivity and help us grow our population more rapidly”.

While I am generally a fan of Bill Evans’ work, I had mixed feelings about this interview. While I agree with the outlined structural headwinds facing the economy and the need to boost infrastructure investment in order to fill the mining capex hole and improve productivity, I do not see why Australia needs “to grow our population more rapidly”.

Australia’s population growth is too high already, placing significant strain on our cities’ infrastructure, housing, productivity, environment and living standards. There are also big question marks over whether high population growth actually improves GDP growth when measured on a per capita basis. And of course a bigger population dillutes Australia’s per capita endowment of resources, meaning that we have to sell-off our resource base quicker just to maintain our standard of living (see here and here for an overview of the issues). Increasing the provision of infrastructure merely to import more people is like a dog chasing its tail and seems self-defeating.

Evans’ view that rising house prices are good for the economy because of the “wealth effect” is also short-sighted, and doesn’t take account of the deleterious impacts on overall productivity (i.e. too much of the nation’s capital pouring into non-productive housing), adverse distributional impacts (e.g. wealth transfer from young to old), or the potential risks for financial stability.

Finally, Evans says nothing about needing to improve Australia’s productivity via a broad-based agenda of micro-economic (structural) reform, which is the key to boosting living standards in the long-run.

[email protected]

www.twitter.com/leithvo

41 Responses to “ “Bill Evans dissects the Australian economy”

  1. flawse says:

    “Evans’ view that rising house prices are good for the economy because of the “wealth effect” is also short-sighted, and doesn’t take account of the deleterious impacts on overall productivity (i.e. too much of the nation’s capital pouring into non-productive housing), adverse distributional impacts (e.g. wealth transfer from young to old), or the potential risks for financial stability.”

    Thanks UE

    It’s time Evans prognostications were put into proper perspective. He’s a damned banker spruiking what will be good for short term profits of the Bank. It has nothing whatsoever to do with the good of the nation.
    The two aims are diametrically opposed.

    P.S. Note however for practical investment purposes Evans should be noted as he and his ilk are the current ‘economic idiots trust’ of the nation.
    Invest in Real Estate and Banks!

    • rich42 says:

      “The two aims are diametrically opposed.”

      And THAT is the problem with Australia. Everything is based on what they want (craftily sold to us) and will always be at our expense until there’s nothing left.

    • Opinion8red says:

      The two aims are diametrically opposed.

      Well said Flawse. That the pontifications and prognostications of economists and other assorted “expert” talking heads — whose livelihoods are dependent on the continued growth of the great FIRE parasite — are lauded and (largely) uncritically accepted, causes one to wonder whether many in our midst have had their basic survival instinct switched off.

    • Pfh007 says:

      Mr Evans understands the private bank /central bank / debt driven paradigm very well and thus his predictions on what will happen are usually quite reliable. Predicting that the RBA will attempt to use interest rates to ‘stimulate’ the economy for as long as is possible is not at all surprising.

      However, as Flawse points out, that is very different to the issue of whether what he ‘recommends’ or ‘predicts’ is in the interests (medium and long) of the country.

      What is good for the private banks is too often confused with what is good for Australia.

    • Rusty Penny says:

      Agree.

      I don’t think any first home buyer considers themselves a beneficiary of the ‘wealth effect’.

      I’d say they are more aware they are under-writing other parties ‘wealth effect’(s).

  2. Dubmac says:

    What about the notion that rapid population growth could be a way to address the ageing population issue.

    Could increased immigration of working age people help us to support the ageing population?

    • Opinion8red says:

      Only if you have a commensurate surplus of genuinely productive employment to give them.

      • flawse says:

        “Only if you have a commensurate surplus of genuinely productive employment to give them.”

        Oh Yes Op8 Absolutely spot on!

      • flyingfox says:

        +1. Also in many cases you may not be improving the dependency ratio. E.g a Family moves two adults and two kids. Net change to dep ratio is zero. If they happen to have one elderly family member then the dependency ratio goes up.

      • Dubmac says:

        Solid point. Cheers

    • Janet says:

      That rapid population increase, to replace aging workers, I guess. Do they not also age?! With improved healthcare etc. any increase in populations for ‘growth’ sake is suicide in the longer term, as the new workers join the older cohort in living on longer. A stable/smaller, more productive population is what Australia needs, not a larger non-productive, all-consuming one….

      • rich42 says:

        Janet, I notice you and I pretty much said the same thing re aging migrants. I’ve tried everything including helping Stable Population Party (which by the way are very amateurish and way too meek to ever get anywhere). I’ve tried to contact Dick Smith, I’ve written to politicians, write on forums pretty much every day. I’m frustrated to see otherwise intelligent people say “we need immigration for an aging pop, or security, or we have to do our bit” It’s nuts. These same people look gobsmacked when I tell them there are 80 million extra people on the planet every year, or our sustainable pop is about 12m. Most don’t believe me. Got any ideas to get this issue out there for people to dissect and realize how ridiculous it is? Anyone?

      • md says:

        Janet, I took it to mean that the rapid population increase is necessary to keep house prices inflating which will increase the wealth effect. As for replacing ageing workers, I think there are a lot of ageing people who would like to work part-time but are considered scrap-heap material simply because of their age.

    • rich42 says:

      Don’t migrants age? Our demographic has not changed with immigration. It’s YET ANOTHER scam to extract money from the nation and transfer it to big business at the massive expense of our own kids. Australia could not be dumber.

      This is so blindingly and infuriatingly stupid. How are Australians being fooled? Surely we are not that collectively dumb to give up everything we have.

    • Dubmac. The simple answer is no. See here for an explanation why.

    • willy_nilly says:

      As UE linked to the answer is no.

      Just some hard facts to digest….

      4.1 million boomers born in Oz
      5.3 million now due to immigration
      80% of boomers will require full or part pensions.

      You can do the math….

  3. lloydie says:

    Infrastructure spending could put the AAA rating at risk, especially if TOT declines after November.

  4. Charles Ponzi says:

    Self-serving banker wanker spruiker.

  5. RickW-MB says:

    To Q2 2013 Australia’s net foreign obligations were AUD816bn and still climbing. That means funds stream offshore in terms of interest payments and profits.
    http://www.financialsense.com/contributors/leslie-cuadra/2011/08/31/list-of-worlds-largest-creditor-and-debtor-nations

    Australia is close to the bottom of the pile when it comes to net foreign obligations – incredibly obligated to foreigners on a per capita basis; more indebted than the Greeks and Spaniards and not far ahead of NZ.

    So called “respected” economists spreading the fallacy that Australia has low debt by international standards is nothing short of mischief – they are taking a very narrow view of what constitutes Australia if they only consider federal government debt.

    It is not surprising that a banker would be encouraging higher levels of debt – they have fat salaries and bonuses that rely on accelerating debt.

  6. Andrew1234 says:

    Yep – going to be interesting if we actually do see a fed taper…

    Bank margins under pressure
    Lower RBA rates – to a point
    Lower stock AND commodity prices

    For all the talk of what Australia is going to do when you look at the CAD and our heavy reliance on mining…and then the demographic situation overseas (that they can’t immigrate their way out of) you get a feel for where this may end up…

  7. Andrew1234 says:

    I personally am quite dumbfounded how many people there are out there that think rising house prices are going to be sustainable against falling business and export conditions.

    Sure, we might get a little flurry here…and there the the “wealth effect” (which is nothing but an illusion)…but how far do people think this can go…

    Our average salaries are nearly twice as high dollar for dollar as even countries like the US. Even in the face of a falling AUD, they are not going to be sustainable if business conditions continue to deteriorate…especially in mining rich states…

    If you look at what is happening in the SME area, there is a potential bloodbath brewing…

    So we are going to have house prices run up because of investors, which is going to make everyone feel rich because of the wealth effect…though there are businesses closing down all around, and people friends being laid off and not able to find work…and rising rents are going to be sustainable, though many people cant actually afford them…so they all move in together…etc…

    The whole argument surrounding property growth pulling Australia out of this alone…is really absurd…(if we were at the bottom of the cycle sure…but now? seriously?)

    If business continues to go south, thus goes property long term…IMHO…it has happened in every other country…

    But…oh that’s right, it is different here…

    • md says:

      You’re right about all the reasons why rising house prices should not be sustainable. But you’re also right about the fact that we’re different. What you didn’t take into account is the government’s determination to do whatever is necessary to keep house prices rising, and it seems they will stop at nothing to do so. It doesn’t matter who gets in tomorrow, they are all in silent agreement about one thing – the property Ponzi comes first, in front of any other policy.

      • Andrew1234 says:

        It won’t work IMO – to keep a fractional reserve banking system alive you have to keep the punters taking on increasing credit…very unlikely long term here…

        You also overestimate how much the government has created this in the first place…the property market has ridden the back of an unprecedented mining boom for 22 years…something created by demographics and debt dynamics offshore…those days are now behind us…

        (I do agree with you to a point…they will try…not having a go…but a bubble is a bubble no matter what you call it)

      • Opinion8red says:

        “to keep a fractional reserve banking system alive you have to keep the punters taking on increasing credit…”

        +∞

      • md says:

        Andrew, I did reply to your reply, but it seemed to get lost in cyberspace…. I don’t know whether the mining boom has actually contributed to the housing bubble much. I think government policies certainly created it along with the huge credit. People will certainly borrow whatever the banks will lend to them, and this has been a major contributor to the bubble, but all the government policies have kept the bubble growing like the rapid population growth through massive immigration and the huge increase in foreign investment. They can also pull more rabbits out of the hat, like increasing the FHOG, and Tony Abbott’s PPL. Of course now that interest rates are low, this will encourage even more borrowing, which is the RBA’s way of making sure the bubble stays inflated.

      • AB says:

        “But you’re also right about the fact that we’re different. What you didn’t take into account is the government’s determination to do whatever is necessary to keep house prices rising, and it seems they will stop at nothing to do so. ”

        Two comments:

        - Plenty of governments in other countries have been determined to keep property bubbles going yet have failed.

        - You have far more faith in the competence of our government (regardless of who wins tomorrow) than I do.

    • Rusty Penny says:

      Let it happen!.. in fact encourage it to bring around fiscal armageddon.

      We’re not dealing with intelligent adults here, we’re dealing with baby boomers.

      They cannot be reasoned with, they have no empathy for their children. They have only ever known how to be net welfare recipients and all they aspire to is greater levels of profligate consumption.

      Accelerate the decline, have Australian become a smoulder ruin and build up from there.

      The people who can effect change won’t, they refuse to. Destroy the sovereign so a new sovereign can form.

      And enjoy the decline in the process.

      • Opinion8red says:

        “Destroy the sovereign so a new sovereign can form.”

        Be very careful what you wish for.

      • Rusty Penny says:

        Why?

        We were the social experiment after the American revolution.

        We were the first for female voting, we were front runners with the safety net, we rushed ahead with socialised education and we introduced the harvester ruling.

        We failed. Progressing after failure means being held accountable first.

        Let us be held into account for our folly. If your worst case scenario of what form the rising phoenix takes, whatever outcome it is, it is a rational outcome.

      • Opinion8red says:

        RP,

        I think you may have misunderstood me. I’ve no problem with the general theme of “bring it on”, reset, start over. Indeed, I think it inevitable.

        I do, however, have concerns about just what sort of diabolical new system would be foisted on us following a loss of “sovereign”-ty.

        Perhaps I’m just being a pedant over choice of words :(

      • flawse says:

        Op8 you are right. We should all be very afraid of what we have been, and are, doing. I feel Marc Faber has it about right. It seems doubtful that the next few decades, once this does blow up, are going to be pleasant.

      • Rusty Penny says:

        Op8 you are right. We should all be very afraid of what we have been, and are, doing. I feel Marc Faber has it about right. It seems doubtful that the next few decades, once this does blow up, are going to be pleasant.

        I’m not denying what is likely to occur won’t be anything othe than unpleasant.

        But is is completely deserved, also it should be felt by the boomers why they are still alive.

        I don’t want to live a life of death by 1,000 cuts, and I don’t want my young children to endure it either, I’d rather than when they are functioning, that economic progress is in an upward projectory.

        Make it fast, make it sudden and make it now.

      • Opinion8red says:

        RP,

        Yep, agree with all that. I’m fully accepting of both the need for, and inevitability of, a full blown systemic crash. What concerns me most (cf. my ceaseless ranting about usury) is that enough people correctly understand WHY it all went to hell in a hand basket … so that they/we don’t blindly accept the even bigger sh!t sandwich the present Masters of the Universe are 100% sure to serve up to us as a “solution”.

      • flawse says:

        RP Just to be clear I wasn’t trying to obscure any of your thoughts on the subject.

        This sure as s..t can’t go on forever and the saying my old mate Herb Stein then becomes relevant.

  8. thomickers says:

    “The currency needs to fall to around $US0.70″

    dollar to 70 us cents!

    • flawse says:

      Too late!
      In any case in our society, as we are now structured, those with the power will just compensate themselves leaving the usual suspects to once more carry the can.