It’s an advanced Western nation with historically weak household debt and rising savings, booming exports but a weak external position, a set of cunningly guaranteed too-big-to-fail banks, slumping house prices and a dramatically two-speed economy. Pop quiz: Is it the US or Australia?
It’s a trick question because the answer is it’s both.
Last week we saw the US ISM illustrate just how similar the US growth track is to Australia. The manufacturing index continues to power along at the best rates in decades. The services index, on the other hand, crashed 11 points to sit just above recession levels. There is a really interesting look at how this split shows up in rail traffic today.
No guesses for why. Housing is once again accelerating downwards and consumers are still deleveraging (if at a slowing rate). So long as that happens, there’s little prospect for a boom in the services economy, which makes up three quarters of output.
Here, of course, you have to change the names but not the story. Mining is the boom sector, single handedly growing the economy, whilst consumption has dropped to into a new, much lower trend. Housing is down and savings are up.
I’d like to ask the question of who you’d rather be? In the shorter run, there’s not much contest, the most obvious difference between the two economies is the unemployment rate 4.9% here versus 9% there. But in the longer term, will it be the same?
First, let’s look at the boom sectors.
There have been two main drives of the resurgence in US manufacturing. The first is a weaker dollar. But just as significantly, productivity has rocketed since the GFC. Some of that is the result of laying off workers. But it’s more than that and it’s so impressive that the US is actually converging rapidly on the competitiveness of China.
If we look to the future, US manufacturing is positioned to rise sustainably as the Chinese growth model shifts from fixed-asset investment to consumption.
In Australia, on the other hand, our boom sector is relying largely on a simple increase in the price of the products it sells (and yes, the subsequent investment that aims to increase supply). There’s been no innovation breakthrough in process or intellectual property. Our general productivity remains completely stalled. And is exacerbated by an astronomically uncompetitive currency. Indeed, our manufacturing sector is being shed quick fast to feed the boom sector.
Moreover, in the longer run, the very investment we are now lauding is going to reduce the prices of the commodities that are driving it. This will be made worse by the shift of China’s growth model away from fixed-asset investment and towards consumption. That is, the commodity boom WILL bust. At that point, we’ll have slow or declining productivity and little capacity left in manufacturing, the sector of the future.
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 there 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.
But in the longer term, it’s a much closer run contest than we presently believe. Lulled by politicians and banks and a media that sees the world in terms of today’s winners and losers, very few see it this way at all.