Australia, it seems, is a speculators paradise.
While the manufacturing sector continues to gasp for air, with manufacturing employment and capital investment both in the gutter:
This week’s national accounts release confirmed that Australia’s FIRE economy – Finance, Insurance and Rental, Hiring & Real Estate Services – continues to grow from strength to strength, rising to a record 11.0% share of the Australian economy in the March quarter of 2014:
In fact, since financial markets were first deregulated in the mid-1980s, the FIRE economy has grown at nearly twice the pace of the rest of the economy:
The situation is even more extreme if Rental, Hiring & Real Estate Services is removed from the mix, with the Finance and Insurance sector growing at well over double the pace of the rest of the economy since deregulation, and hitting an equal record high 8.3% share of the economy as at March 2014 (see below charts).
Anyone seeking an explanation as to why Australia’s FIRE economy has expanded so briskly only has to view the below chart, which shows Australian house prices decoupling from rents at roughly the same time as the FIRE economy’s growth decoupled from the rest of the economy:
Put simply, the deregulation of the financial sector ignited credit growth, most of which has been channeled into housing at the expense of business, inflating Australian home values in the process:
A key ingredient behind the surge in credit growth, house prices, and the FIRE economy’s growing share has been the explosion of property investors, whose absolute size and share has risen inexorably over the past two decades, and exploded over the past year, of course assisted by Australia’s peculiar tax laws (e.g. negative gearing):
Like Frankenstein’s monster, it would appear that the financial sector, which once acted merely as an enabler of the productive economy, is now pulling its master’s strings. And in the process is killing-off the productive economy.
