Grey beards warn on “double bubble” economy


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.

David Llewellyn-Smith
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  1. To what extent has Australia’s embrace of free trade contributed to our current economic imbalances? In theory, our economy should shift to focus on what we have a comparative advantage in. Is this part of the reason for the mining boom – it’s what we are good at. We’re less good at manufacturing, compared to others, so manufacturing has declined. It turns out that we are less good at a lot of agriculture (horticulture for instance) so we import from cheaper source countries.

    Free trade has made us richer, but it has also resulted in adjustments to the economy. We’ll adjust again, eventually, although it might require pain and misery first.

    • Free-trade is not the issue. The distorted investment regime is. We been busy mis-allocating capital for so long into pointlessly inflationist stuff that we’ve let our competitiveness fall much further than we should have.

      If we hadn’t we could still be making all sorts of stuff we once did and innovating for more.

      It’s value judgement we’ve made not an economic inevitability.

      • I certainly agree with your sentiment about distorted investments regime BUT I suspect we have less time to re-broaden our Aussie economy than most economists assume.

        In all manufacturing businesses breaking new ground (starting something new) requires more than just willingness. In management circles we talk about business inflection points and disruptive technologies. As an example flat screen TV replaced CRT’s at an amazing rate during the 2000 – 2008 period. This changeover caused a once great company (Sony) to crash and burn yet at the same time two new TV space giants were born Mstar for silicon/knowhow and Samsung for product. Without the changeover Analog to Digital and CRT to flatscreen it is unlikely that either of these companies would have been able to challenge the might of Sony in both the parts and end product spaces.

        Similarly for Australia Inc to break into new global product areas requires these same business inflection points AND some locally developed “disruptive technology”, the inflection point could be something as simple as a deep Aussie recession but without the local “disruptive technology” the recession will be all pain and no gain

      • Re: CRTs to flat screens:

        Something similar happened between 2007 and 2010 where a seemingly invincible Microsoft was simply blown away by the iPhone and iPad. Windows controlled the dominant computing platform for more than 25 years. It was thought that nothing could loosen Microsoft’s stranglehold on the sector, and yet today MS is struggling for any significant market share in the mobile space, and its share of a shrinking PC market is dwindling.


      • Perhaps promoting R&D better under the banner of the Federal Science and Industry portfolios could be of some assistance with the development of disruptive technologies.

        IMHO excessive malinvestment/siphoning of funds into obscure social science and humanities faff has given .gov involvement in R&D a bad name.

        Great article and comments btw.

      • @lorax,
        It is interesting that the end of the M$ story had a few preview chapters that certainly showed the way forward. Netbooks in 2005/6 had all the MS functionality but built on a linix framework (of course most people just loaded pirated MS)
        The early days of tablets was similarly a mixed bag of *nix with something-Android-like, the real breakthrough came with the realization that useful information could be displayed on 4inch to 7 inch screens. This was the breakthrough, this was the end of stupidity of putting real processing power in the handheld device, this allowed the shift in mobile device to connectivity PLUS display replacing the MS tool environment. Processing, storage and databases moved to the Cloud allowing the mobile device to focus on UI and Display

    • Strange Economics

      So how much more till the house price bubble tops? Bubbles can go on for years, till the last buyer can’t get a mortgage. Then you just sell the aparment overseas. 15 % of GDP in Housing? A high tech economy?

      • IMHO Australia will have a US 2003-2006 like housing boom that’ll burst when local interest rates climb abruptly. The housing boom of the early 2000’s was supported by ultra-low ARM mortgage rates following the tech wreck and 2001 recession. Look no further then the abrupt upswing on option ARM rates around 2007 to understand the future that awaits Australia. The only thing that might save us is our housing construction incompetence, it’s the old story scarcity created by supply side management actually extending the demand window…..only in Australia would this stupidity make sense

  2. “annual economic growth at 2.8 per cent” is made of what?
    Net migration/yr is about 200,000 plus 250,000 foreign students.
    That makes say 450k consumers, champing at the bit, a burning desire to spend.
    Each person needs shelter, food, services.
    And there it is – a good chunk of the magic thing called “economic growth”.
    Overpriced property, pressurised rents, imported food, imported clothes, imported furniture, imported cars, etc
    More people importing stuff, not quite balanced by increasing resource exports.
    Just run it down. Deficits to the centre of the earth.
    One of the top job growth areas is cafe manager.
    A baritsa-lead recovery.
    Nothing to do with productivity – most of that was result of computerisation over last 2 decades.
    With zero population growth & without foreign student population running at x6 times the USA rate, what would be GDP?
    In terms of net debt to the economy, probably a net benefit. There would be less necessity to fund new infrastructure.
    Really, the only reason I see for high population growth is to feed the FIRE economy.
    If Aus is going to predicate rising GDP on rapidly rising population, then how about some structural guidance?
    Watching successive govts drive backwards is a bore.

    • Yes!

      Real position of the citizens of say 20 years ago has been eroded in many ways through dilution of commodity resources and dilution of infrastructure in the city (increased congestion) and real net incomes per capita for lower socio-economic working groups being about stagnant.

      The focus on GDP in nominal terms without adjustment for inflation and population growth and without equal focus on other measures of quality of life is misleading for citizens.

      We need percentile measures by age band and income/asset bands to see where any real per captia benefits are going and who is not getting a fair share of any growth.

      • Agree Explorer, that information would be fantastic. Inflation must correctly consider & weight land price growth, as the “have-nots” have been well & truly shafted by hyperinflation for over a decade and the statistics must show this fact.

  3. In our view, the economy does not have significant imbalances that need correcting.

    See, all peachy. All this hang-wringing about a houses and holes economy, completely reliant on a single commodity exported to a single country is a total non-issue.

    Go for a walk in the sunshine and smell the roses:

  4. 6% annual growth in commodity exports.

    Rule of 72 says that the export volume will double in 12 years at that rate of growth.

    In the next 12 years at that rate of growth we will export more resources than in all prior history.

    At the end of the next 12 years our resource life will be less than half what it is now.

    We are on track to the mid century collapse predicted by “The limits to Growth”.

    There is a NASA funded study covered that warns that economic collapse occurs when population growth outruns resources or elites take too much of the share of wealth. We are on our way to both.

    • There is a NASA funded study covered that warns that economic collapse occurs when population growth outruns resources or elites take too much of the share of wealth. We are on our way to both.

      Collapse nonsense. All we need is to lower our expectations, move a little further out and work hard like the older generation did.

    • Explorer puts the macro issue back into MB. We won’t need to worry about house prices if we continue to fall for the myth of ” sustainable economic growth”. It’s an oxymoron.For a reality check I can recommend OURFINITEWORLD.COM which exactly reaches the conclusion of the study mentioned.

  5. boomengineeringMEMBER

    The conspiracy theorists in the US reckon that the next bubble will be in food prices, if proved true that would be worse than house price bubble except that at least people would not accept it as readily.