Australian Economy

The “miracle” Australian economy (with its famous run of 24 years without a recession) is an amalgam of pre-modern and post-modern industries with very little in between.

Most economies run at least partially upon the productivity gains produced out of manufacturing and ‘making things’ but in Australia productive investment is supplanted with commodity exports (which make up half of exports) and the recycling of the resultant income is deployed as cash flow for borrowings offshore to pump house prices.

The former step is basically the selling of dirt, a pre-modern activity. The second step is managed via the sophisticated use of derivative markets and is essentially a post-modern activity.

Not that GDP cares given it is only the mindless measure of whirring widgets.

However, both of these activities systematically reduce economic competitiveness by inflating both input costs and the currency. “Dutch disease” by another name. This continuous “hollowing out” of productive activity means the broader economy relies heavily upon the non-stop import of capital, either in the form of debt or in the form of assets sold to foreigners, to generate ongoing income growth.

So long as the underlying income from dirt keeps flowing then the leveraging into house prices that supports consumption can continue, supported by both tax distortions and government spending.

If, however, the dirt income flow halts the hollowing out of modern industry will leave the Australian economy very exposed to a current account adjustment. We saw this in the global financial crisis but the flow of dirt income was restored sufficiently quickly to prevent any deep adjustment.

A second risk is that the debt accumulation simply becomes overly onerous for the underlying economy to service, also resulting in a current account adjustment. Well north of $1trillion of the debt is owned externally and household debt is a world-beating 186% of GDP so this is a real risk.

It is offset by a relatively clean public balance sheet that deploys fiscal stimulus in times of economic stress. However, in recent years, as both of the two above risks have increased, the public balance sheet has deteriorated as well, setting Australia up for a famous adjustment to end its famous bull run.

MacroBusiness covers all apposite data and wider analysis of these issues daily.


Australia can’t build its way out of population ponzi

By Leith van Onselen The full speech that Ken Henry gave to CEDA yesterday has been released, and Dr Henry pulled no punches in admonishing the Government’s negligence in managing Australia’s mass immigration program. Below are the key highlights: In the broader community, there is considerably less support for a larger population.  People are concerned


Who wins from penalty rate cuts?

From Morgan Stanley: Today the Fair Work Commission announced cuts to Sunday and Public Holiday wage rates. We see this a positive development for retailers given Sunday is increasing in importance as a trading day. Our analysis shows a theoretical boost to FY18 EBIT of 4-12% for retailers under our coverage. Sunday is big: We


More on crapex

Via UBS: Q4 capex dropped 2.1% q/q in Q4-16 (after -3.3%), still slumping 15.5% y/y Private real capex fell more than consensus again, down 2.1% q/q in Q4-16 (UBS: -2.5%, mkt: -0.5%), after -3.3% in Q3-16 (was -4.0%). This continued the ‘capex cliff’ with the y/y relapsing to a poor -15.5% (after -13.1%). By sector,


An economics lesson for the population ponzitiers

When foreign supermarket chains ALDI and Costco entered Australia, did Coles and Woolworths welcome them with open arms? What a silly question. Of course not. The entry of foreign competitors undermined their pricing power. So much so, that recent RBA research credited the entry of ALDI with a 13% reduction in grocery prices. Good for


Ken Henry’s eight point plan to save Australia

From the AFR: Our politicians have dug themselves into deep trenches from which they fire insults designed merely to cause political embarrassment. Populism supplies the munitions. And the whole spectacle is broadcast live via multimedia, 24/7. The country that Australians want cannot even be imagined from these trenches. …Based on current estimates, Australia needs to


Sunday penalty rate cut another hit to wages growth

By Leith van Onselen Over the past two days we’ve witnessed real wages barely increase: And more importantly, real average weekly earnings registering zero growth after falling 2.1% since May 2013: And now we are likely to get more downward pressure, with Fair Work Commission slashing penalty rates for Sunday workers, affecting literally hundreds of


Real average weekly earnings take a pounding

By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Average Weekly Earnings (AWE) data for the six months to November 2016. A breakdown of the key changes are provided below: According to the ABS, on a seasonally-adjusted basis, national total AWE increased by 0.9% in the six months to November 2016,


Mining capex falls heavily in Q4

By Leith van Onselen The Australian Bureau of Statistics (ABS) today released data on capital expenditures (capex) for the December quarter of 2016, which registered another 2.1% seasonally adjusted fall in capex volumes over the quarter and a 15.5% decrease over the year (see below table). While Houses and Holes will cover the forward-looking capex


Only in Australia could fighting a housing bubble make you a racist

By Leith van Onselen Doomsayer. Gloomster. Recessionista. Mischievous grumpy bum. These are all names used against housing bears in Australia. But now we’re all racists as well. RBA Governor Phil Lowe yesterday lamented the ‘insidious’ resentment of immigrants caused by the over-crowding of Australia’s major cities, and called on governments to dramatically lift infrastructure investment.


Ken Henry warns on unplanned population growth

By Leith van Onselen In July last year, Ken Henry raised the alarm on Australia’s excessively high population (immigration) growth, noting that “our population is growing at a rate that exceeds the capacity of traditional models of planning, building and pricing access to the nation’s infrastructure and housing”. Then in December, Dr Henry returned to


BHP gouges itself with gas

Via The Australian: BHP Billiton chief executive Andrew Mackenzie, who took a $US105 million cost hit at the Olympic Dam copper and uranium mine in South Australia after recent blackouts, says the nation’s renewable energy schemes could raise costs and reduce power security while having no impact on emissions. The head of the world’s biggest


Coal and gas to blame for NSW blackout

Oh dear: More than 2000 megawatts of thermal generation failed during NSW’s power scare earlier this month, when AGL asked Australia’s largest smelter to curtail its production for more than three hours to avoid blackouts across the state. A report by the Australian Energy Market Operator confirmed plant outages on the afternoon of February 10 at


Wages growth plumbs another record low

By Leith van Onselen The Australian Bureau of Statistics (ABS) has just released its Wage Price Index for the December quarter of 2016, which revealed a continuation of weak wages growth across the economy, with annual wages growth falling to the lowest rate in the series’ 19 year history (see below charts). According to the


Westpac’s leading index retraces

From Westpac’s Bill Evans: The six month annualised growth rate in the WestpacMelbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 1.36% in December to 1.30% in January. This marks the sixth consecutive month where the growth rate in the


What does the BHP result tell us about growth?

Via Deutsche: Remains a FCF and de-gearing story near term BHP has reported 1H FY17 underlying NPAT of US$3.2b and EBITDA of US$9.9b, slightly above our US$3.0b and US$9.8b estimates respectively. Operating cash flow was strong and net debt decreased by US$6b HoH to US$20.1b, but was assisted by a US$2b non-cash benefit. Capex guidance


Is “solar reserve” the answer to SA power?

Via Reneweconomy: The US-based developers of the world’s leading solar tower and storage technologies has expressed surprise that Australia’s federal government is pursuing “new coal” plants, saying that solar towers with storage beats coal on just about all fronts. Tom Georgis, the head of international development for SolarReserve, says solar towers and storage can match