Recently I argued that the Australian economy is much closer to the US economy than we give ourselves credit for. One half of it at least is, the slow half (or should I say three-quarters):
In the slow halves of the two economies, housing and services, the US is deflating much of its debt and slowly working through its excess of housing supply. The aching post-financial crisis grind that afflicts all credit-bubble nations is advancing as banks slowly work off bad debts, asset prices return to historic trend and supply balances with demand. Sure it’s public sector is still building a serious liability as it supports this process but with the world’s reserve currency, it can.
Here, our private sector debt accumulation has slowed but not yet reversed. Asset prices remain at cosmological levels. The overbuild of houses is probably not as bad but post-bubble demand is not yet revealed. And the banks and parliament are in fairy land about the sustainability of it all. On the upside, the people have sensed that all is not right and are preparing for the worst by rebuilding their saving ahead of time. The RBA has encouraged this, knowing that the jig is up on borrow and consume.
Fact is, both economies are going through a post-GFC adjustment. I’d still prefer to be Australia, because we’re able to get through the adjustment with rising income from the mining boom rather than falling income, which is the usual path for post-credit bubble economies.
At the same time, however, there’s no doubt Australia had a better GFC than the US. Much better. We didn’t even have an official recession – two quarters of negative growth (though we did in GDP per capita terms). This was the result of two factors which, it truth, boiled down to one. The swift deployment of fiscal stimulus here and in China meant that we kept demand largely intact at home and demand for our exports was intact abroad.
So today I want to draw a second analogy, this time with the Chinese economy, with which we share the fast half (or should I say one-quarter) of our economy.
Comparing Australia to China is in some ways even more startling than it is comparing us to the US. First, let’s look at the effects of fiscal stimulus that carried us through the GFC. In China, the stimulus took the form of accelerated infrastructure projects and a credit-fueled housing construction boom. Take a look at this chart from Huy McKay at Westpac:
Yes, that’s a rather large ramp up in residential construction. And now, take a look at what happened here to residential building approvals during the GFC:
Not quite the same but not that far different either with an historic high of approval volumes and a clearly dramatic effect of stimulus. The point is made more clear when we add non-residential building approvals:
And then here:
Again, quite different but nonetheless parallel in the effect of stimulus on credit from late 2008 (I am not suggesting both countries’ experiences were the same, rather just a broad parallel. Australia has much higher household debt than China, accumulated over a much longer time frame). The Australian surge of debt to fuel construction is underlined further by the growth in public debt that funded much the non-residential building program and grew from effectively zero to $185 billion today.
Since then, of course, Australia’s construction levels have returned to somewhere around trend. China’s, however, have not and that brings me to the major point of this post. As our new China blogger, Zarathustra, makes clear today, China and Australia currently share two other quandries. The first is that, having built their way through the GFC, they now face the reckoning of the credit push that came with the spurt. In China it’s an effort to rein in private credit growth. In Australia it is both that and the endeavour to return the Budget to surplus. And second, in both economies, this is raising tensions within monetary policy.
For instance, as Zarathustra writes today:
The People’s Bank of China has raised interest rates and reserve requirement ratios a number of times since last year as the government pledged to make inflation fighting and property price curbing their top priority. So far, the two main objectives have not been achieved. However, the effect of tightening has been increasingly visible.
For instance, tightening means that potential home buyers are now finding it difficult to obtain mortgages to buy real estate according to the WSJ. As the government implemented buying restrictions in various cities, demand for real estate has declined sharply, leading to a decline in transaction volumes in various cities. Prices have held up so far.
But it is not clear for how long.
Right now, those words could just as easily be applied to Australia.
Truth is, both nations had a great GFC owing to a different mix of the same Keynesian policy prescription. And both now face the difficult challenge of managing the inflationary consequences of their individual and combined success.