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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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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