Mirror image

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.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. Deus Forex Machina

    Dead right unfortunately…the RBA and your Bullhawks seem intent on making the driving the economies even closer together

  2. “But it’s more than that and it’s so impressive that the US is actually converging rapidly on the competitiveness of China.”
    H&H, as you know, half US-China “trade” is shipments inside the same company. A lot of US manufacturing is already Chinese.

  3. FWIW, I would much rather be in the US than Australia. Ultimately the US will come out of this with a lean and mean manufacturing sector, and world-beating productivity. Australia will be lumped with a lot of excess capacity in the resources sector and scorched earth in the rest of the economy.

    Of course Australia doesn’t have the stupendous government debt, high unemployment, and moribund housing market (not yet anyway) but contrary to mainstream opinion, there are reasons to be optimistic about the US economy.

    Put it this way, a technologically innovative, globally competitive business is going to get rewarded in America today, whereas the same business in Australia is going to get bashed around the head by the currency and high interest rates, and told to give up and get digging.

    That’s a strong market signal that can’t have good long term consequences.

    • Lorax, I kind of agree, but it depends on who you are – if you are the classic “Aussie battler”, then the USA is not for you.

      The US is an empire in decline, there are no two ways about it – and it will take a generation or so for them to get out of that funk, as did prior empires (UK e.g) more so because of their structurally unsound economy.

      not so sure about “world beating productivity” – through exporting all jobs overseas, sacking your domestic workforce and reducing the US dollar to a peso??

      Go tell the Germans about productivity – strong currency, high labor costs, yet they innovate and produce and manufacture the best stuff in the world. And they have good governance to boot (sic)

      • Prince,

        Job growth is looking pretty good in the US, and there are a lot of good jobs being created in manufacturing, technology etc. So I don’t think “sacking your domestic workforce” is representative of what’s happening in the US at the moment. Perhaps in 2009, but not 2011.

        The Germans did very well out of the weak Euro during the various PIIGS crises last year (and I’d hardly call the Euro “strong” against anything except the US dollar) but now that the Euro is strengthening I think German export growth will come off a bit. Those Beemers must be getting expensive in China now!

        I didn’t say I’d actually want to live in the US. I’d prefer to run my business under the prevailing economic conditions over there, but nothing would make me move there.

        As for Aussie battlers … if you’re poor then Australia is an infinitely better place to be, and we can afford a generous welfare system as long as the mining money keeps rolling in. What worries me is when the resources bust comes (coupled as it must be, with a housing bust) and government revenues dry up. How do we afford our welfare system when we’ve destroyed our economic base?

          • Yeah 3d1k Lorax is opening up a can of worms but he is spot on with his comments….. It is only a matter of when it will happen not if anymore.

        • @Lorax “What worries me is when the resources bust comes (coupled as it must be, with a housing bust) and government revenues dry up. How do we afford our welfare system when we’ve destroyed our economic base?”

          That is what worries me as well. This is spot on…. but my other even bigger concern is the Govt Guarantees as if that when bad then it would put Australia in the same boat as the US, Greece, Ireland etc…..

        • You make some excellent points; very few people actually consider the combined effect of many of the different factors at play in the Australian economy. The loss of stamp duty revenue for the state governments alone is killing their budgets to the tune of billions of dollars a year; this is only the beginning of at best a long down turn in housing and therefore a long down turn in state government revenue. Some of my fellow commenters have likened the situation to a can of worms, to me it’s more like a Pandora’s Box that once opened cannot be closed and will make life for many Australians deeply unpleasant.

          We may currently have very low levels of government debt compared with the rest of the world, however without the mining boom to bail us out we don’t really have the means to pay it back. Howard and Costello imposed years of welfare cuts and sold off many government assets including Telstra in order to pay back a great deal of government debt. In the current situation we have no golden goose to sell and when the mining boom slows down or is supplanted by cheap commodities from Chinese holdings in Africa, Australia is in real trouble.

          I don’t quite think that the Americans are better off than us in the long run but with continued fiscal mismanagement, bad government policies encouraging speculation and a commodities boom that could end at any time it appears that we might be that far behind them.

      • Lorax, again I agree on most of your points – although job growth in certain sectors in the US is good, overall, job growth is negative: they are simply not creating enough jobs for those who want them due to population increases, and of course, unemployment is vastly understated in the US (real is ca. 15% – see here: http://globaleconomicanalysis.blogspot.com/2011/05/digging-still-deeper-in-fridays-jobs.html)

        You hit it on the head with the “battlers” – and that is my main concern.

        I believe we will end up like the PIIGS – but with very very high cost of living – regardless of whatever micro- or macroeconomic reform is made over the next 5-10 years. That train has left the station IMO.

        No one likes to talk about the corollary of the US States debt problems and the Australia States debt problems – relying on GST revenue from rampant consumer spending and stamp duty receipts from rampant housing consumption for speculation is not a recipe for sustainable economics.

        Although the current debate about the Federal government debt is futile – it will come into the fore when the States start running larger deficits and require bailouts.

        • Australian State governments’ reliance on stamp duty is a catastrophe in the making. When the Feds have to take over health and education, then we’ll see some deficits!

          • Yeah and if the banks cant pay back those guarantees the govt has favored then how much debt would Australia be in.

    • The biggest problem with the US is that the Rule of Law has quietly been suspended to allow TBTF banks and others to indulge in whatever frauds they like.

      Allied to this is a highly dysfunctional political system unwilling and unable to address the issues because it’s bought and paid for by Wall Street.

      In short, a control fraud.

  4. Armand Tamzarian

    Having recently returned from the US to be honest I’d prefer to be back there. Among other things Australia has got to be one of the highest cost of living places to be.

    The big problem, which brought my company undone, is the fiscal position of the states (and municipalities). Hardly rates a mention over here with the focus being on the federal deficit, but that states and local government is where the big problems are. The feds are a sideshow.

    I’d agree with the comment above though about it being no place to be if you are an “aussie battler.”

    re: mining
    I think you are selling it short when not giving credit for innovation. There may or may not be innovation in digging holes but there is innovation and intellectual advancement in methods to discover where to dig.

  5. Don’t worry. All those uber productive public servants at the federal, state and local level will pull us through. There must be at least 1 million + of them. They can innovate and develop red tape to make it all go away.

    Our leadership is the best in the world.

    Abbot-a failed monk and economic illiterate.

    Joolia- a failed communist.

    Brown-Liberace in a green dress.

    Malcom Turnbull- Has dual citizenship-Australian and Goldman- Sacsland.

    Who me worry when the shft? We have got 5 years for the percolation to be done.

    Don’t cry for me Australia. Cry for your children.