Last week, the Unconventional Economist made a fascinating comparison between the rhetoric of the Canadian and Australian central banks on overvalued houses. He noted how much more candid the Canadian central bank has been about the degree of house price overvaluation and the need to mitigate those risks.
As we know, neither the government nor the Australian central bank has ever openly acknowledged the great Australian housing bubble. Last week I noted how the RBA has hinted, through various speeches, that it got interest rate settings wrong in the millennium business cycle, and it has openly called time on the debt accumulation of the past 15 years or so. However, it has never actually just stood up and said: “housing is overvalued” and prices are a risk (or should fall).
We can theorise about why this is the case. Perhaps it’s because Canberran economists doesn’t believe there’s a bubble. I have seen very respectable Treasury officials stand up in public and declare that the pre-2003 run up in house prices was later rationalised by the mining boom. Perhaps the RBA agrees. Perhaps it sees housing over-valuation as part and parcel of record terms of trade, even if one preceded the other.
Perhaps Canberra genuinely believes the bubble is the result of an imbalance between supply and demand, even though that contention contains myriad assumptions, including that the declining number of Australians per household is somehow an historically objective and irreversible fact.
Perhaps it is because Canberra fears that if it points to the elephant in the room, it may wake up and run amok, stomping Australian wealth and exacerbating a two speed economy.
Anyway, rather than acknowledge the obvious, Canberra has instead dedicated much of their rhetoric to the positive in Australia’s post-GFC economy: the mining boom. It talks constantly of the high terms of trade, celebrates the structural rise of China and India and make purposeful noises about record investment levels leading to interest rate rises and fiscal cuts. It refers to an economic adjustment, how we must make room in the economy for mining and how other parts of the economy, usually manufacturing but also consumption and the use of debt, must be held in check.
This has worked to dampen growth expectations amongst exporters and is slowly deflating the housing bubble, Australia’s number one economic imbalance. House prices are falling slowly (if you live anywhere other than Brisbane or Perth) and consumer sentiment readings are showing that housing an investment is really on the nose. All to the good.
However, it is also increasingly obvious, that the softly, softly approach (deliberate or otherwise) is opening a space where the denizens of the old housing economy can continue to happily spruik their wares in the hope of reviving yesterday’s debt binge. And I don’t just mean the usual suspects in the housing industry: data suppliers, real estate and banks.
No, I mean the broader services economy that has built itself on the assumption of every increasing values in house prices and the illusory demand that comes with this growth model. Over the past few days, we have several examples of interest groups turning up the pressure on Canberra vis-a-vis the two-speed economy that emanates from slowed housing growth. The first is a range of retail interests that today headline The Australian on industrial relations complaints:
Three of Australia’s retail giants have joined the criticism of the government’s workplace regime, warning that it is damaging a key part of the economy and leading to excessive wage costs that could trigger job losses.
Contradicting Julia Gillard’s claim she does not encounter many businesspeople raising the Fair Work system as a frontline issue, shopping centre owner Westfield is warning that high labour costs are contributing to increasing prices for consumer goods and could lead to job losses in the retail sector that was once the nation’s largest employer.
Woolworths – which employs 170,000 people – also warns that constraints on labour flexibility threaten to further erode the retail sector, which has been hit by a surging Australian dollar that is encouraging consumers to shop over the internet.
And the chief executive of the Myer department store chain, Bernie Brookes, yesterday complained that the “leading party at the moment are pushing for labour market restrictions and you’ve got the opposition noticeable by their absence from the argument”.
“If anything, the restrictions are now getting more significant,” Mr Brookes told The Australian.
The warnings come as opposition Treasury spokesman Joe Hockey will today use a speech to CEDA to urge greater flexibility in industrial relations.
Mr Hockey – the Howard government’s last workplace relations minister – says “re-regulation” is preventing employers and employees from tailoring conditions “to suit their mutual preferences”.
Mr Hockey stresses he is not advocating a return to Work Choices, but adds: “None of Labor’s changes will assist businesses to adapt to structural change. We see the increased power of the unions, which are now flexing their muscles in the ports and the mines. And we have moved to an environment where workers can strike before rather than after negotiations.”
The National Retail Association claims retailers will have to give staff above-inflation yearly pay rises of 6 per cent because of wage increases and Labor’s award modernisation process that the Prime Minister spearheaded as workplace relations minister. Westfield says retailers trading later than 6pm in Australia are paying almost three times the hourly rate paid in the US, which means penalty rates are making it uneconomic for retailers to open for late-night trade.
Let’s take a peak at retail labour costs according to the ABS:
There is an obvious bounce in retail labour costs in late 2007 and 2008 but Labour’s new IR laws did not come into force until mid 2009 (h/t MattC). As well, there’s a pretty clear downtrend to levels that look similar to the turn of the millennium global recession making a strong case that the 2007/8 spikes were a part of the broader business cycle as Australia was seized by inflation more generally.
In short, I’m inclined to conclude that suffering retailers want to pass squeezed margins resulting from the larger macroeconomic shift described above onto labour.
The other recent report is the State of the Regions Report commissioned by the Australian Local Government Association. The report is unavailable, sadly, but according to Sky News:
Australia’s local governments have been warned the current mining boom is not big enough to carry the national economy.
The Australian Local Government Association says its latest State of the Regions report indicates there is a risk that business confidence might evaporate in regions that depend on non-mining industries.
The report, launched at the association’s general assembly in Canberra on Sunday, acknowledges that mining makes up only about 20 per cent of the economy.
The other 80 per cent is being adversely affected by the high exchange rate and relatively high interest rates in a ‘patchwork economy’.
Economist Peter Brain, who co-authored the report, said difficulties were arising for non-mining trade-exposed industries because of a faltering recovery from recession in North America, Europe and Japan.
That had led directly to reduced demand and indirectly to increased competition as businesses in those countries tried to increase exports.
‘For those who never look beyond the headlines, the current mining boom would seem large enough to carry the whole Australian economy with it,’ Dr Brain said at the report’s release.
‘But this has not been the case.’
Economic extremes were being experienced across the country.
In Queensland, times were prosperous in the Bowen Basin and in towns and cities that supported the construction boom, Dr Brain said.
‘By contrast, far north Queensland is doing it tough because recession overseas and the high Australian dollar have hit the tourist trade.’
Association president Genia McCaffery said the report’s findings were a challenge for the federal government.
Canberra needed to help regions make the most of their individual strengths, she said.
Also today, Australia’s sentinel of vested interests is ramping up his campaign in defense of the old economy. I suspect this is just the beginning and is precisely why the mining lobby is out in front on a making sure we all understand just how valuable it is.
To my mind, Canberra is to blame for this. By treading overly softly around the housing bubble and instead focussing on the benefits of mining, these interests of the old economy are free to roam without much check on their rhetoric. If Canberra added to its narrative a fair dinkum assessment of the fact that the borrow to pump housing and consume model of growth is dead, such arguments wouldn’t have a leg to stand on. Instead, we have a brewing information war between the old and new economy.
