Alan Kohler is the first of Australia’s commentary greybeards to wake up and smell the coffee:
Australia’s version of Dutch disease is turning into an emergency; we might have survived the GFC, but the way things are going we won’t survive the SMBC – the small to medium business crisis.
Yesterday’s monthly business from NAB should be setting off alarms in Canberra and through every bank and big company boardroom in the country: Australia’s non-mining businesses are in serious trouble just as the resources boom ends. There will be nothing to take its place.
Businesses are reporting that all aspects of trading conditions in virtually all industries are weaker than they have been since early 2009, when they were recovering from the global credit crisis. Wholesale, retail, manufacturing, construction and even mining are all reporting that things are tougher than they have been since the GFC.
Bravo! He goes on:
…a big gap has opened up between what businesses are saying about what’s happening and what the ABS is reporting.
Anecdotally, businesses are closing at an alarming rate, with SME owners giving up and looking for a regular job instead.
It appears to be the so-called Dutch disease, when a commodity-based terms of trade boom pushes the currency high, which destroys the competitiveness of non-resources industries.
…For Australia the problem is given added urgency by the fact that the mining investment boom is going to peak next year and begin to decline and the commodity price boom has probably already peaked.
The great challenge facing the Australian economy in this decade is going to be what replaces the mining boom when it ends.
Bravo! He goes on:
And although, theoretically, that will lead to a fall in the exchange rate and therefore an improvement in the state of export and import-competing industries, it is not just resources investment that is keeping the dollar high.
…This global shortage of AAA-rated securities is not going to end in a hurry and will ensure that Australia’s Dutch disease problem will not necessarily end with the end of the mining boom.
OK, so we’ve identified the problem. Now let’s turn to the solution. The dollar must be lowered. This can achieved by some mix of the following:
- fiscal adjustments that reduce household borrowing. This might be removing negative gearing from established houses, the imposition of Tobin taxes on international hot money flows or the application of open macroprudential limits on lending, etc
- we might also conduct a Wallis Inquiry and shift the burden of bank guarantees off the public purse so we can run deficits
- once we adjust the fiscal incentives, we can then lower interest rates without fear of a housing blow-off and print money (openly) for the portfolio flows drive up the dollar (if that is still necessary).
You may have noticed that none of these options comes without pain. The choice before us is not whether we can get out of this cheaply, it is how we want to spread the pain for the greatest benefit to the nation. To not act now simply means we are waiting for Dutch disease to get bad enough that interest rates can fall low enough that the dollar can also fall. In other words, hollow out our tradable sector so that the dollar can fall and rebuild our tradable sector. Does that sound sensible?
Hopefully Kohler can run with solutions in the days ahead.
For more on the topic try Bob Gregory:
