Paul Bloxham has a good note out today following up on last year’s Dutch disease study and summing up why he thinks Australia can pull off the The Great Rebalancing, from mining investment-led growth to a resumption of consumption-led growth. It’s a good read for the optimsits.
I’ll quickly summarsie a few of the assumptions to give you an idea of the argument:
- house prices will rise 6% in 2013 and 2014 owing to catch-up for the past few years
- retail will rebound on good income growth, lower interest rates, passing deleveraging and more dwelling construction boosting household goods
- tourism will rebound on Chinese middle class growth and the passing effects of the still high dollar
- education ditto
- business gearing is low and will leverage up some to invest
This is all reasonable enough if it were 1996. In that year we could expand offshore bank borrowing by the significant amount required to fund this borrow and spend expansion, as well as run the current account deficit of 6%+ that it implies.
But in 2013, I have my doubts. The counter-argument would go:
- house prices cannot expand anything like this rate becasue the expansion must be internally funded owing to regulators, ratings agencies and investor caution
- as the terms of trade slowly falls, income growth will be very subdued so retail will also struggle, delveraging has not started
- tourism will grow slowly on greater Asian middle class wealth but the dollar effect will mean no growth in Australians holidaying at home
- education ditto
- in an environment of subdued demand, deleveraged Australian corporates will have no reason to increase investment
I expect all of Bloxham’s impacts to be modest. To me the upside for growth comes from just one souce, a bigger government deficit.
Some will say that’s pessimistic. I don’t think so. The negative case is much worse.
121207 Australia’s Great Rebalancing Act – Looking Beyond the Mining Investment Boom
