Mining boom rhetoric dies with job cuts

Do you get the sense right now that the Australian economy is a little rudderless? If you do, I don’t blame you. This morning’s media coverage of yesterday’s jobs result is chock full of “surprises”, “shocks” and “unexpecteds”. I’m not sure why that’s the case. It’s no surprise at all. MB has been forecasting this outcome for over six months. And the marginal employment data itself has been howling it since September.

Some of the disconnect is no doubt the result of media headline seeking. But there is also a deep disconnect between the rhetoric of our economic leadership and the reality of both the economy and its context.

Here’s what Bill Shorten had to say yesterday about the jobs result. From the AFR:

Acting Treasurer Bill Shorten said 2012 would be an “extremely challenging” year.

“But it’s important . . . that we don’t become unduly pessimistic,” he said. “In some sectors which traditionally have been large employers, like retail and manufacturing, there is pressure on job numbers.

“[But] we do see growth in the mining sector and the health sector. It is certainly a two-speed economy.”

So, it’s Dutch disease then? A two speed economy because the dollar is so high, which is squeezing manufacturing. Well, yes, but that does not account for the retail job losses. And let’s not forget that this is what we wanted right? Canberra’s Mandarins wanted to “free up” room for the mining boom.

The Leader of the Opposition, Tony Abbott, was just as perverse, saying:

…the jobs result was “very disappointing and it demonstrates how important it is [to] get debt and deficit under control”.

“We will be in a much worse position to deal with any renewed global financial crisis than we were in 2008, because in 2008 we had a massive surplus. Today we have a massive ­deficit,” he said.”

So, cutting public spending will save us from a weak jobs result? It didn’t help Greece (notwithstanding a few little differences).

There is not one story, not one piece of analysis, not one comment, that I can find that is attached to the reality of the Australian economy right now. That reality is threefold.

First, we do have a very narrow boom going in mining. Sure it’s big but it’s a sectoral boom, not a national one.

Second, we are not exceptional to the effects of the new global era of debt-conservatism. Australian households are still up to their eyeballs in debt. They know it. Global markets know it.

Third, and following on, we are caught in a big economic adjustment that has hardly been mentioned, the deflating the millennium credit bubble based around housing and consumption. The size of this bubble was enormous and the new mining boom simply cannot support it.

In short, as one narrow boom inflates and one much broader bubble deflates, we are seeing the economy seeking a new equilibrium that is leaner and less labour-intensive, less spending driven and more more savings and investment oriented.

I can think of two possible reasons why Canberra does not want to talk about this reality, one for the executive and another for the legislature.

The executive is perhaps too scared to discuss it for fear that the bubble will burst suddenly. The RBA gets it, I think, even if last year’s charged interest rate rhetoric suggests it’s not universally accepted. Maybe it’s too difficult to acknowledge given some of the same people in power today allowed the bubble to form in the first place.

For the Government and Opposition, however,  it’s more obvious. Aim for a fiscal surplus for political reasons, hoping to drive the RBA to cut interest rates and stimulate house price growth – replicating the Howard/Costello model. It’s ironic if that’s the case, given they have no choice but to aim for surplus anyway, thanks to the ratings agencies and the Budget’s support of the banks.

Moreover, the politics of rate cuts, whether in the national interest or not, is still gold in the polls. I note the Government continues to trend higher since rate cuts became a real possibility and more so since becoming a realty. Who needs coherence when life’s getting cheaper:

It will be interesting to see if monetary and fiscal authorities can maintain a consistent narrative on the economy this year. Rate cuts to boost spending are fine. Rate cuts to boost borrow and speculate are not. It’s only 22 months since Glenn Stevens told us so on Sunrise and household debt to disposable income has only fallen marginally from 155% to 151% since then. I’m not sure the Government would agree.

David Llewellyn-Smith

Comments

  1. No surprise to me along with many other MBers. I expect things to snowball as our country turns from disleveraging to deleveraging…

  2. Great comment on the p*ss weak political commentary.

    “So, cutting public spending will save us from a weak jobs result? It didn’t help Greece.” Gold. Abbott really is a C grade power at any cost polli. Mr Turnbull please.

    Bubbled house prices ease> retail, motor vehicle and other discretionary spending ease with ‘equity maaate’>unemployment slowly rises>House prices further ease>retail etc discretionary spending eases more>unemployment slowly rises a little more….repeat ad nauseam

    …watch from sidelines with one cocked eyebrow monitoring bank stocks for a short.

    • A future Turnbull ministry with Joe Hockey or Chris Joye as Treasurer?? No thanks. I shudder at the thought.

  3. Bravo HnH. Very well explained

    “First, we do have a very narrow boom going in mining. Sure it’s big but it’s a sectoral boom, not a national one.

    Second, we are not exceptional to the effects of the new global era of debt-conservatism. Australian households are still up to their eyeballs in debt. They know it. Global markets know it.

    Third, and following on, we are caught in a big economic adjustment that has hardly been mentioned, the deflating the millennium credit bubble based around housing and consumption. The size of this bubble was enormous and the new mining boom simply cannot support it.

  4. Given that the retail sector is 12% of the workforce (nearly 1 million people) and it is going to have to shrink by about 1/3 over the next few years (households not using house equity to spend + saving like its 1978 + buying online) we are going to see a big jump in unemployment.

    If the mining boom continues we could end up in the situation of having a strong GDP *and* high unemployment. As someone recently pointed out – you can’t just take the girls from the perfume counter at Myers and stick them in a mine.

    As for the interest rate cuts, a cursory reading of the politics chapter in Boganomics suggests that whichever political group promises the biggest action to lower rates will win the bogan vote. It is the bogans inalienable right to have a negatively geared investment property that consistently increases in value.

    • Ah, I do miss the Boganomics crew.

      I had a discussion with a old mate yesterday about just that subject and he was livid at his bogan brothers.

      You see, he’s an old school bogan from the country, a bucolic bogan if you will, and he sees himself as an entirely different species to his his city-slicking cousin.

      He made the point that country bogans are Bogans 1.0, interested in salt of earth stuff – RM Williams, flannies, V8s, utes and long-horns – where as the new breed, the aspirational bogan, Bogan 2.0, disgusted him.

      All that floor space, Charlie Sheen on the huge screen and jet skiis was anathaema to him.

      Just goes to show, you can’t judge a bogan by its cover.

      • Wow, generational bogan rivalry! Boganomics is an amazingly good read – hats off to the authors. I wish it’d been around a few years ago, if it had I certainly wouldn’t have been so bewildered by the Stereosonic crowd for one thing, or Aussie politics for another.

        Boganomics, as good as an interest-free, Hummer branded Jetski endorsed by David Guetta. Well, not quite that good LOL

        • Generational bogan rivalry would be an inspired topic for the next bogan themed commentary. Who amongst the crew is brave enough to delve deep into such perilous territory? 😀

          • The whole bogan thing is so passe.

            I would prefer further analysis of TBJ’s lycra clad middle management mania for cycling and other ball crushing activities!

      • Toil and Trouble

        Classic commentary – perfect Friday laugh, sadly though it’s not an embellishment of the truth.

        I have to deal with version 2.0 Bongans often and I struggle with their general lack of common sense – I should have asked for Bonganomics for Christmas.

      • RM Williams?

        Bought a pair on sale after christmas (winning)still expensive but I expect I will get a few good years of use out of them.

      • Yeah Boganomics funny commentary always get a laugh when I go to the comments section and see some goose moaning about the bogan then regailing the thread with stories about his serious cycling lifestyle, it’s like lycraing up is not the biggest middle management fad out there at the moment. I like the keating line to describe todays corporate cycling cliques “Conga line of suckholes”.

    • Where are these million people you talk about in retail? I can never seem to find anyone every time I go to DJ or Myers;-))

    • Decent points from JPM, but whilst it can be called seasonal, it’s also consistent with the general notion of the shedding of retail jobs, which bloggers and commenters here at MB have been calling for a while now.

      Jan, Feb, March will be very interesting (in a bad voyeuristic way…) for retail jobs figures…

  5. Agree that the RBA knows it. It will be interesting to see if the banks do pass on any/all rate reductions, if they occur. Not sure what the electorate will make of it if the RBA lowers and the banks do not. Certainly a political headache of some magnitude for the government.

    • There was some discussion here yesterday at the peoples bank between myself and a colleague about the difficult situation the banks find themselves in vis-a-vis the rate decrease quandary.

      With banking activity falling taking profit margins with it, the banks can either increase their margins and/or lower costs to maintain profits. However given the RBAs insistence that banks stick close to the official cash rate the only option left is to reduce costs = sack loads of bank workers.

      Admittedly the banks have got a bit fat over the years so a cull is in order, but there is an argument to be made that the banks should be able to set rates where they like, and let competition between them find the market rate. Of course this only happens as long as the banks don’t collude with each to fix rates, but they would never do that. Ever. Well, hardly ever.

      The (typically) higher rates would keep a lid on property prices and help the banks manage risk better. But of course high interest rates are an anathema to our happy McMansion dwellers, and they consequently vote with their jetski throttle fingers for the party that keeps them low. So the political headache is between higher unemployment or higher interest rates.

      • Two prime political headaches I suspect: Unemployment – will likely go higher. Interest rates – RBA will likely go lower. The RBA may ‘insist’ banks remain close to official rates, but can it ‘enforce’?

        • The RBA has said that they take bank margin shifting into account so they’ll just keep cutting until they reach their desired cash rate. One reason I think rates are going lower than many think…

          • But whence demand?

            Ideally oil must come down commensurately. Ideally we are not mired in the fug of recession. Idelly. the carbon tax has no negative impact. Ideally, the housing market picks up. ToT do not deteriorate substantially. And so on.

          • True, but the RBA must know after last months 24 hour delay by the banks to do the margin dance that the next decrease or two won’t budge the big four. Unless they slash by a margin too big for the banks to conscionably ignore, say at least 50 base points. A 25 base point decrease won’t have any effect IMHO.

            BTW, we still can’t decide if the 24 hour delay last time was because one bank didn’t have the cojones to ignore Swann even after concerted pressure by the other three, thereby forcing all the banks to capitulate and drop rates, or if they were all softening Swann up in preparation for standing him up at February’s rate cut party. Can anyone shed any light on that?

          • Not much below zero, BUT they can pull the trick that the US and Europe have done and that is to devalue the AUD currency, and that would be interesting times.

  6. Jumping jack flash

    The problem is the buck doesn’t stop here. It circles through the different services of our service economy and then shoots off to where the stuff we buy is manufactured.

    High wages spent on overseas manufactured trinkets and the rest given to the banks for debt repayment.

    Super profits handed back to China for equipment and materials and the rest on debt repayment.

    All gone.

    In my opinion the government must have seen the tax revenues shooting up and thought that everyone was rich from the mining boom. Not the case. If it was, retail wouldn’t be in the gutter like it is.

  7. I think you give the politicians too much cred HnH. They are just striving for a surplus becase that’s what the voters want after Howard and Costello turned surpluses into a national obsession. The thought process stops there.

    • Well promoting the MacroB blogsite will go a little way to kick starting the thought process again.
      I do so dislike a Gov’t surplus when the nation has this infrastructure shortfall.

      • We’re not talking about rational people here. Politicians are caught in a trap of their own making. Both Labour and the Liberals will hammer the economy; the only difference will be their weapon of choice.

  8. Worldwide macro trends are all too often missed by the “mass media” – hence their apparent view that the events of 2008 were unpredictable. When demand from China inevitably eases the mining sector won’t be faring as well (other than perhaps those who are mining precious metals). I am surprised that Australian politicians haven’t thrown their hat into the currency wars ring and devalued the dollar.

    • Jumping jack flash

      “I am surprised that Australian politicians haven’t thrown their hat into the currency wars ring and devalued the dollar.”

      That makes two of us. I suspect “the greatest treasurer on earth” ™ and our RBA still thinks that we have magical dirt that the rest of the world will need massive amounts of forever, and will buy at any price.

      But, can you imagine what would actually happen if we were to join in the global currency war? It wouldn’t be pretty because we import quite a lot of essential stuff. Stuff that’s already expensive with our high dollar.

      • If we joined the global currency war then what would happen would be the opposite of last year. All those times the RBA didn’t raise rates last year when inflation was boiling because imported goods helped deflate the inflation index. The horrible thing about all of this of course which was mentioned at the time was that the group inflation affects the most were the least likely to buy the goods that helped keep inflation down.

        Now that we are going into reverse and the dollar falls I argue we may not be stimulating as much as we think we are by lowering rates. Essentials if the AUD goes down will of course go up in price – and to be honest not everyone has a mortgage but most people eat, drive or use oil in some way.

        The truth is lowering interest rates is treating a symptom of the problem by encouraging it to continue – by encouraging more debt and spending when what we should be doing is repairing the household balance sheet. The problem is too much debt on housing – disposable income after housing costs is slowing disappearing either due to increased housing debt and/or cost inflation.

        We don’t need interest rates to fall – which would just be a short term fix till the debt catches up and we are back to where we are now. We need less debt and an interest rate that makes the cost of capital something meaningful.

  9. Nobody is mentioning IR policy.

    The step back into the IR dark ages is a major factor for the bad employment data.

    Business should be supported and not hindered by draconian IR laws.

    This is also central to stimulus. If you support and encourage businesses to invest and prosper then the need for government stimulus becomes redundant.

    It’s real simple stuff but the people in Canberra answer to the unions and the unions don’t like to hear about things like ‘profitable private business’ and ‘productivity.’

    • Kohler wrote about it today. And yes, the pendulum has swung a bit far back I think.

      But what have you heard non stop from retailers for the past year? Lousy IR or lousy demand?

      Retailers are closing all over as well as not hiring.

      • Jumping jack flash

        Are there switched on retailers who realise the demand they’re grown used to over the past decade was created by the debt bubble over the same period, and want to try to kick start the borrow to spend model again by calling for low interest rates?

        Everyone seems to have had enough debt though.
        No more debt, thank you very much Mr. bank, I’ve had my fill.

        Or are the retailers just repeating the “lower the interest rates now, stimulate the economy” meme?

    • It’s real simple stuff but the people in Canberra answer to the unions and the unions don’t like to hear about things like ‘profitable private business’ and ‘productivity.’

      Pretty sure the Unions don’t have a problem with those terms. What they don’t like to hear is things like “management remuneration increasing 3x faster than worker remuneration”.

      • “What they don’t like to hear is things like “management remuneration increasing 3x faster than worker remuneration”.”

        Yep.

  10. Going back to the headline of this article, RE: rhetoric, we have not heard much public RBA-speak lately. There was plenty of jawbowning last year. There are no speeches scheduled before the next RBA board meeting on the 7th Feb to be followed by the SoMP on the 10th Feb. Actually, no speeches listed before the 6 Mar board meeting either.
    .
    My point being, it will be interesting to note if there has been any major change in rhetoric since last year out of the RBA. That Wordle technology will come in handy.