FIRE sector continues to bleed economy dry

By Leith van Onselen

Last week’s national accounts release for the June quarter confirmed that Australia’s FIRE economy – Finance, Insurance and Rental, Hiring & Real Estate Services – continues to party hard, surging to a new record high (11.9%) share of the Australian economy (see next chart).

ScreenHunter_14911 Sep. 13 14.03

Since financial markets were first deregulated in the mid-1980s, the FIRE sector has grown at roughly twice the pace of the rest of the economy, sucking the life out of the productive sector:

ScreenHunter_14912 Sep. 13 14.04

Within the FIRE economy, the finance and insurance industry increased its share of the Australian economy to a record 9.0% of GDP in the June quarter:

ScreenHunter_14913 Sep. 13 14.06

With the finance and insurance industry growing at well over twice the pace of the rest of the economy since financial deregulation, with diverging trends:

ScreenHunter_14914 Sep. 13 14.06

The FIRE sector has enjoyed life recently. Households have re-leveraged, as evident by the trend decline in the household savings rate over the past four years:

ScreenHunter_14915 Sep. 13 14.09

Along with the rise in the ratio of mortgage debt-to-GDP to an all-time high 95.1% of GDP as at June:

ScreenHunter_14916 Sep. 13 14.12

The banks have also ramped-up their exposure to offshore funding, particularly short-term:

ScreenHunter_14778 Sep. 06 15.32

With the ratio of offshore borrowings to GDP an insane 53% of GDP, easily surpassing the pre-GFC peak (51%):

ScreenHunter_14917 Sep. 13 14.32

The end result is that Australian house prices continue to decouple from rents as capital has flooded into non-productive housing:

ScreenHunter_14918 Sep. 13 14.34

With overall housing credit growth still expanding at 6.7% in the year to July 2016 – much faster than nominal GDP (+2.8%) – the FIRE economy is set to continue consuming the real economy, as is household debt.

There’s life in the dumb bubble yet.

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