It is always refreshing to hear the views of retired politicians. Once freed of party room constraints, you can judge who was in it for the right reasons and who is a professional hack. An example of the former today is Dr Craig Emerson who actually, brace yourself, used the word “bubble” to describe the Australian economy. “Double bubble” to be precise. From The Australian:
Australia’s economic history since the turn of the century has been one of bubble, bubble, toil and trouble: a housing bubble, a mining bubble, the toil of dealing with a global economic crisis and the trouble with relying on bubbles again.
…a set of national accounts recording annual economic growth at 2.8 per cent has led commentators to declare the Australian economy is in recovery mode, successfully making the transition from a mining boom to more diversified economic growth.
To his credit, Joe Hockey has not joined in the euphoria. The Treasurer knows a transition from a mining investment boom to sustainable alternative sources of economic growth requires more than soaring house prices and the expansion in home and apartment construction…
…we can’t rely on bubbles for a sustainable recovery. In a small, open economy like Australia’s the only sources of sustainable growth are improving international competitiveness and increasing productivity growth.
Exactly right. Dr Emerson was joined by Professor Ross Garnaut at the AFR who used a similar framework to focus on three dimensions of the emerging challenge. First, the Budget:
Corporate tax revenues from resources are declining with capital deductions from the boom in resources investment – and will do so for several years. The policy changes implemented so far by the new government have accumulated to something like a net $2 billion a year over the forward estimates, if we exclude the capital contribution to the Reserve Bank. If other policies are implemented as announced, the replacement of the carbon laws and introduction of paid parental leave will lead to an additional budget deterioration of $10 billion a year or more.
…Then the government wants to add about $10 billion in today’s dollars a year to defence.
…Sooner or later structural changes in the budget must be made and, whether they come from removing tax concessions or reducing expenditures, they’ll put downward pressure on economic activity.
And on our reliance for housing and consumption to fill the growth gap:
Early reliance on domestic demand from housing, consumption and government deficits to support rising economic growth is unlikely to be consistent with sustainable external accounts in the years ahead. Growth in export volumes at around 6 per cent a year is actually a step down from the average rate of growth in export volumes in the two decades before the resources boom. It sits alongside a powerful secular tendency for the import share of expenditure on goods and services to rise with deepening integration into the international economy. The overwhelming concentration of export growth in resources limits its contribution to current external payments as well as to domestic economic activity, so growth in export volumes is smaller than it looks. Lower terms of trade and higher interest rates will increase the current account deficit, which then has to be financed at what may be an unpropitious time.
And back to productivity:
From the end of the 1990-91 recession to the end of the century, Australia’s productivity growth was at the head of the world league table, and yet the improvement against the average of other high-income countries was never more than a percentage point a year. To bridge the competitiveness gap that emerged by early 2013 through productivity growth alone would take many decades.
Early action on the revenue and expenditures sides of the budget would be helpful to real depreciation as well as important in the necessary budget adjustment. Early progress on raising productivity would allow Australians to retain as much as possible of the increases in living standards that have accumulated in nearly a quarter century of continuous economic growth.
None of this is to say that the bubble economy can’t be inflated and inflated again with each new challenge and at greater later expense. But at least some folks beyond MB are saying it in advance.
Others are perfectly sanguine. Paul Bloxham in The Australian today:
The fourth-quarter GDP numbers showed, economic growth is picking up and, more importantly, it is being supported by rising household consumption.
A key reason why this is happening is that monetary policy is working. Low interest rates are continuing to support a boom in the housing market, which is feeding through to a pick-up in the forward indicators of residential construction and a rise in retail sales.
…In our view, the fall in mining investment will be partly offset by the drop in capital imports because much of the equipment used in the commodity boom was sourced from overseas…The labour market tends to lag the economic cycle, usually by two to four quarters. This implies that if the turning point in activity was in September last year, as we think it was, the labour market should start to improve from the second quarter of this year.
…Another reason we have remained optimistic about Australia is that only economic growth needs to rebalance, not the overall structure of the economy. In our view, the economy does not have significant imbalances that need correcting.
I agree that the jobs market is firming and has decent quarter or so ahead of it. The question is can the cycle accelerate as the job losses in mining mount up, the housing market reaches nose-bleed levels and consumers remain conservative on spending their capital gains?
Even the RBA and government concede we need to improve our competitiveness to keep the cycle running via a pick-up in tradable investment, which is a structural adjustment. It would be more than fair to be optimistic about said adjustment being possible within a context of growth, but to deny it needs to happen at all undermines the entire argument.