Wish me luck as I wave you goodbye…

After last week’s bifurcated capex survey from the ABS analysed here, today we have the release of the Australian Industry Group’s own capex survey (see below). And it’s bye, bye manufacturing, with a bullet:

Anyone knows that to make stuff these days you need to compete with low cost manufacturers in Asia. To do that, you either need to be investing in productivity enhancing equipment, or innovating like buggery through R&D. The above graph says it all for Australian manufacturers. They’ve given up. The expected capital expenditure is down an extraordinary 28% year on year and R&D is down too, just as we’re supposed to entering the handoff to the private sector in this business cycle.

And there’s also a bizarre pattern emerging in services. First, executives are expecting a huge jump in spending:

Hello? Clearly not everyone has the memo about Australia’s new normal. Where exactly do services executives think this historic spending binge is going to come from? As this blogger has explained before and the RBA has been at pains to explain, if consumers shift to spending, rates will rise, choking off spending.

The capex projections from the same services firm’s actually do reflect this reality:

So, we’ll just have to put the expected top-line growth down to some “positive thinking”.

The only other image from the AIG report that is worth canvassing is this one:

One wonders if a slightly more sombre photo of  AIG head, Heather Ridout, would have been more appropriate as her core constituancy embraces oblivion.

Business Prospects in 2011 (1)

Houses and Holes

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 fouding 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.

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Comments

  1. “One wonders if a slightly more sombre photo of AIG head, Heather Ridout, would have been more appropriate as her core constituancy embraces oblivion.” But never Heather.

    I have long felt that large mining and infrastructure projects should be, dare I say be encouraged, if not compelled to have a significant proportion of the contract supply Australian sourced. It is common for these companies to quote “???m Australian direct spend”, alas this is often simply the wages component. Container upon container of overseas sourced componentry is landed on docks daily. A significant proportion of this could be manufactured here (and once was). Small to medium workshops and plants all over the country busy producing everything from nuts, bolts, specialised engineered components, steel fabrication, hyraulics, workwear, etc to sophisticated one-off design requirements. Thousands of additional jobs employing the unskilled and skilled alike. Reals jobs, real income, real difference.

  2. This could mean that the government was actually being amazingly prescient when they were importing hairdressers and food poisoners. Sadly it looks like their plan to have a completely service and mining based economy is not going to work out either.

  3. Allow me to propose raise a very heretical proposal:

    A 10% tariff on all goods/services imported in to Australia. Without exceptions (so there is no arbitrariness whereby government gets to meddle and play favourites)

    In exchange for this rise in tariffs, there would be a 10% or more reduction in government tax take in Australia (there would be different ways of doing this, and people might argue about the figures, but for arguments sake let’s say this could be done by reducing income and corporate tax rates by 10% across the board).

    Before you gasp, let’s just say I have reasonable runs on the board when it comes to supporting free trade and low tax. For this reason, I appreciate the political advantage it brings to have any discussion of new tariffs shouted down as economically illiterate – because it means there is one area which is off limits for government to raise taxes. I also appreciate that imposing tariffs would be in breach of trade agreements so it would be difficult to do.

    So to be clear, I believe that in a perfect world there would be no tariffs. But in a perfect world there would also not be the current tax rates we have in Australia. A tariff is just a tax. The real goal we should be aiming is for the lowest tax rate consistent with the level of government services should provide (and there will be debate on this – put me down as saying government does far too much and poorly while taking far too much).

    In Australia in 1900 we had higher average tariff but virtually no personal income, corporate, sales or other taxes (let alone a Carbon Tax). The overall tax take was less than 5%.

    In Australia today we have virtually no tariffs but incredibly high person income, corporate, sales and other taxes, etc (the list is endless). The overall tax rate is somewhere around 40%.

    The overall tax component of the goods we buy is higher today than in 1900.

    Which situation is really preferable from a free market perspective?

    If we are creating a high-tax regime in which to do business but then allowing goods/services to come in is it any wonder that Australia manufacturers feel like they are sitting ducks?

    If there is a short slap-down response to this, I would be very interested in hearing it.

    Yours in heresy,
    Dingo

  4. One word describes this report: “Rubbish”

    I will also state briefly my opinion of “leadership” which is:

    “leadership” a priori, inhibit growth. And Australia “Leadership” is unusually good at choking the life out of National socio-economic growth. They are also superior at the impositions through taxation; any tax will do.

    The service industries in Australia started their unwinding in 2007 and if you look around, they are still in active decline.

    Ho hum

  5. I’m sure all those factory workers who have been “freed up” (Gittins! TM) have already moved on to fabulously well-paid jobs in the resources sector.

    There is the annoying little detail that manufacturing (still) employs 10x as many people as mining, but no doubt Ross will explain to us ignorant plebs how that’s gonna work in some future piece dripping with condescension.

    Christ knows there’s an economics editor I’d like to see “freed up” permanently. He must be retirement age by now, surely?

  6. LOL @ The Lorax.

    Dog knows there are a few that could go on permanent holidays, but they are good contrarian indicators.

    As for retirement, probably not, since he is probably advocating raising retirement ages to 85.