Kohler rings bell at top of great Australian expansion

From Alan Kohler on the weekend:

It will be almost impossible for Australia to have a recession for at least five years, probably 10; it means the run of 25 recession-free years will extend to at least 30, possibly 40.

Australia’s colossal mining investment boom, which involved two years of $24 billion per quarter of capital expenditure for resources exports, is well and truly over, but it will definitely result in net exports contributing at least 2 percentage points per annum to real GDP growth for 15-20 years.

So for Australia to have a recession, the domestic economy would need to shrink by more than that much. It’s simply not going to happen.

Alas, the net exports component of GDP does not work in this way. Export volumes only add to GDP when they are higher than the year before. The current boost is a one-off as mining boom major projects move from investment to production. After that, only rising demand or capturing market share can add more to growth each year. For Kohler to be right about an endless 2% contribution of net exports to growth, all of those shiny new mines will have to universally increase volumes at some spectacular rate every single year (or imports to collapse) in perpetuity.

The truth is, the precise opposite is going to happen. Once all major projects are operational within 18 months, LNG producers will be forced to cut volumes as the global glut persists through the mid-2020s. Iron ore will be the same as major miners finish their supply increases and Australia’s 40mt of junior production disappears as Chinese demand bleeds lower. Coking coal will follow iron ore but do better in volume terms given Australia’s monopoly. Thermal coal volumes will shrink with decarbonising global demand.  Gold may do better if the price keeps rising. In short, within 18 months time Australia’s mining net exports boom will be over and will, in fact, be withdrawing from GDP each and every year.

Having said that, there is a uniquely Australian underpinning to GDP that does protect us (or pollies) from technical recessions. It’s not net exports, it’s the population ponzi that raises the consumption base by 1.5% every year regardless of per capita growth. It must be added that market forces play a big role in immigration and if Australia is hit by a decent shock then migrant numbers will also fall materially for a time, so it’s not foolproof.

Back to Kohler:

This leads to a couple of conclusions: first, that the normal process of governments being thrown out after recessions will continue to not work, and second, we need a different way of measuring the economy.

Over 25 years without “recession” headlines, governments have either died of old age (Howard, 2007) or self-destructed (Labor in 2013 and the Coalition, almost, in 2016). In 1972, 1983 and 1996, (and ­almost in 1961) recessions did the work.

If the Coalition doesn’t find a way to destroy itself, there’s no reason it should also die of old age in 10 years time, or longer.

It’s not GDP that matters to voters, it’s income, which is the key quantitative measure of standards of living. The great turnover of governments in recent years has, in part, been driven by suicidal policy, but the driver under that has been falling and stagnant wages. As folks have gotten poorer they’ve looked for answers from government, which have simply not been forthcoming, or the wrong ones have been offered. So the polity has looked for answers in new governments.

The two key drivers of income growth are the terms of trade and productivity growth. The former is set to resume its falls next year as the bulk commodities correct again. The latter is basically stuck at zero thanks to the population and housing ponzi. So there’s no return to historic levels of wages growth coming and the Coalition is already in deep trouble at the next election.

Back to Kohler:

The only risk to the domestic economy appears to be housing: apartment construction won’t continue at the current rate, and in fact there seems certain to be a massive oversupply in 18 months time.

The housing investment boom might have replaced the mining investment boom, but it’s nothing like it: that’s because the results of it — apartments — are not productive assets like LNG plants, mines and ports.

…But it isn’t necessarily the case that apartment construction will suddenly cease or that prices will collapse, largely because the flow of money from China has probably only just begun.

…China’s growing wealth is also resulting in other booms as well: vitamins and supplements (Blackmores and Suisse), baby formula (Bellamy’s), wine (Treasury Wine Estates), tourism and education.

Actually, if your productive assets are producing less and less every year then the growth analogy of building less and less apartments each year is a good one. Both will be withdrawing from GDP within 18 months and probably sooner. Regardless, whether Chinese money flows here endlessly is a policy choice not a fait accompli. It’s already slowed a lot as tensions rise around Chinese economic imperialism and those pressures will obviously increase. At minimum, the Chinese services boom has a major and growing political headwind. Viewed through a glass half empty, the population ponzi model could unravel as its contradictions with our strategic outlook implode.

On Kohler’s other Chinese booms, if you use a microscope you can find a small rise in Australian agribusiness exports in recent years but, in reality, the income derived has not grown since 2013 despite a falling dollar. The “dining boom” is basically made up.

Back to Kohler:

…then on top of that is government spending.

The federal government is not spending, and in fact is trying to cut back, but the states — especially NSW and Victoria — are starting to spend big on infrastructure.

This is more true than Alan realises. The federal government is also spending with its ears pinned back and it is increasing not decreasing. It’s just not investing the money like the states are, preferring to piss it away on consumption so it can pretend that the economy is healthy.

So, what are we to make of this piece from Australia’s leading business journalist? As a single article it is perhaps harmlessly ignorant. But as a cultural artifact the wider hubris is plain. The assumption that Australia will grow forever is these days not even backed by rudimentary data or the clever talking of one’s own book, only by a series of lazy blunders. Nor does it mention that we’ve been in an “income recession” for five years.

That’s the rub, what the article does offer is the usual “endless growth” confidence trick to support participants in the house price ponzi scheme that is the only real driver of private sector growth that Australia has left, as well as helping disguise the Budget bleeding that is its last real income support.

All told, that seems a pretty good metaphor for an exceptionalism-stuffed and failing Australian political economy heading for a major recession even in its own absurdly limited terms.

David Llewellyn-Smith
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  1. Kohler summons the Chinese confidence fairy to buy us out

    How fortunate we don’t have all our eggs in that one red basket

    As for the Coalition not dying of old age, it won’t. Alan needs to learn from an oncologist the survival rate for Stage IV cancer.

    • MD, the bell has rung for the Coalation.
      Now that ON has support from The Donald, watch how both incestuous major political parties are wiped out in the next 3 years .

    • It will be almost impossible for Australia to have a recession for at least five years, probably 10; it means the run of 25 recession-free years will extend to at least 30, possibly 40.

      I take this as Kohler’s “Even God cannot sink this ship” moment.

      The Chinese Confidence Fairies are real – they are just very treacherous demonic beings disguised as creatures of light and they have a tendency to gleefully blow great foggy mists in front of economic icebergs.

      • Australia is like Noah’s Ark, We the Strayan people are the chosen ones. Dog looks after us, particularly those of us who are ‘just trying to get a head”.

  2. We are in an income recession. We have been for 3-5 years.

    After all, that is the purpose of 457 visas.

    I think a lot of voters are conflicted – they want house prices to keep going up but do not want themselves to be replaced by 457 visa workers.

    Cannot have your cake and eat it.

    • Rising house prices are a substitute for rising incomes as far as spending across the county is concerned.

      The smart house owners can have their cake and eat it too. At least for a time.

      • Rising house prices augment consumption. (Otherwise where is the borrowed money going?)

        So in absence of the land boom, spending across the economy would be lower. Land boom backed spending may not completely replace incomes (…. yet… although we haven’t seen the extremes of where the government and regulators want to steer this dark circus) but it makes a contribution. And probably enough of a contribution to decide between expansion and contraction.

  3. Risk management is a thing of the past in business as well as politics. They all think central bank actions can save any situation. Australia has one of the most vulnerable economies in the world. Due to globalisation and central bank interference and correlation everything will happen at once and there is nowhere to hide.

    Just as in investment, for macro-economics diversification is dead, we are all hedged to hell and back against volatility.


    • The 7.30 expose on Subprime investors last week was a great example, you can insure against risk. Is QBE and Genworth still insuring these subprime mortgages? If so it won’t be for much longer.

  4. I must confess all this focus on GDP and how many years it has been since we have had a recession brings me back to something an economics lecturer drummed into me a generation ago – that economies move in cycles………that for periods of strong growth, there will be periods of weaker growth and negative growth, and that periods of weaker and negative growth have the effect of removing economic imbalances and excesses which are built into the system during the periods of strong growth (like excessive investment, speculation) and would invariably lead to demand reanalysis and product displacement. Sort of like that periods of reduced growth, or negative growth, while painful, served a greater good as far as the whole system cycle goes.

    From there I sort of drifted quite easily into the idea that that the default of capitalism was probably extended periods of low growth, where the elites (or owners of capital) tended to rent seek rather than invest in stronger growth, sufficient to spur aggregate demand to levels which would drive fuller employment, and Keynes showed us quite conclusively (as far as I was concerned) that [without going into money creation, and within the current privatised money creation dynamic] governments and policy could intervene to spur aggregate demand to spur employment and provide better quality of life for whole societies. But even Keynes never got away (as far as I am aware and I have read the guy pretty thoroughly) from the idea that there was a sort of cycle which would have periods of lower growth and higher growth (though noting the down periods tended to reflect wasted capacity where they became contractionary).

    All this focus on GDP seems to me to be resonate of policymakers not ever wanting to have any part of a cycle which removes imbalances; that their policy (ies) – to avoid recession for as long as possible, and to avoid the address of imabalances which have now built up over a long period of time in Australia – amount to some sort of new world where GDP weaker periods arent actually strong enough to remove imbalances, and from there ultimately to the possibility that GDP growth for growths sake is far more important than having those imbalances addressed. A sort of weird ultra Keynsianism where after Keynes proved that the government could stimulate growth then the owners of capital (in Australia at least) wanted government and got government which would bend everything to generating that growth, and which would ensure that they got the right positions in the economy to ensure that they (essentially the 1%) got all the benefits (that of course they didnt pay tax on it) and that the economy the 99% of us experienced became ever more deformed by the inability to ever address the accumulated imbalances, or to do anything abut the ‘growth’.

    I see all the talk of not having a recession as sort of like a doctor telling someone ‘You will never be able to shit again’ and from there observing of the behavioural and physical manifestations of someone being unable to shit (maybe the jaundice, the physical cramps and the psychological stress), ‘you are looking incredibly healthy, arent you lucky’

    • Ahhh…so we will eventually see a change of emperors, but the poor/middle class will be never be better off and the rich rent seekers will salt away (or piss away) their wealth, albeit forced by the new emperor to pay a stipend for the privilege.

      How long before China controls our current owners? Ad then owns them too?

    • And just slowly the polity have begun to realise that they will need one monster shit, but will have zero notice when that will be and that is not helpful for growth and jobs.

  5. Looks like Kohler has gone the way of Trevor Sykes.
    Somehow their separation from reality is going to ruin both their reputations.

    • These guys don’t get judged the way the rest of us do. If a big downturn occurs they just show up, look as if they are above it all, point to a few charts, explain the causes (to some degree) and don’t mention their past proclamations.
      Nice work if you can get it.

      • FS, maybe in the past. Syksey made some hallucinogenic calls on say BHP and the Banks recently and was well hauled over the coals at least here. He has rarely been heard of since.
        MB keeps the bastards honest.

    • Hi Wiley

      Do you have any numbers on the GC High rise apartment situation – what’s on and in the pipeline?
      (Just got female friend thinking of dipping their toe in and using my best persuasion to tell her to be cautious) (Mind you this money printing game looks far from over!)

  6. Everything he is saying is right
    At least from government point of view
    The actions and policies by government we have seen in the last 4 years are pretty much based on all these facts
    Denying them is not gonna help anyone or fix any issues
    We have to live with the fact that house prices are pushed up artificially by government to avoid recession
    Sorry MB but you guys are living on another planet

      • Saw this somewhere. Definition of an economist: Someone who lies awake wondering whether what works in practice can possibly work in theory. As for the current state of play: stand up, David Richardo, and bow your head in shame.

    • +1 The RBA has successfully orchestrated an enormous wealth transfer from the working poor to property speculators cheered on by the ultra low interest rate zealots
      There is no reason why they will not continue to do so.

  7. reusachtigeMEMBER

    These guys have been proven right over and over again no matter how many times youse all cane them. Without any doubt, not even slight doubt, it’s boom times ahead in housing!

  8. Kohler needs to go to dying suburbs of Perth and hand out flyers with his latest brain fart and see if he can make it from one side to the other without being run over by all the ex-mining uber drivers.

    • Some Uber charts would be interesting. Uber per capita. Unemployment in other fields vs uptake of Uber. I wonder if it would reveal anything.

  9. Globalisation says that if Europe goes down…everything else will.
    Look at Deutsche Bank:

    Balance Sheet:€1.6Trillion
    Equity:€68Billion(4% of balance sheet)
    Market Value:€16Billion(1% of balance sheet)
    Derivatives:€60Trillion(20 times German GDP)
    US Fine Pending:US$14Billion
    Market Price:2007:US$150
    16-9-16:US$12….down 92%

    I believe Kohler doesn’t get it.

  10. I love the image you’ve used with this story.

    Do you reckon this was how cherubs kept themselves amused in the days before Harley Davidsons?

  11. Jumping jack flash

    “The housing investment boom might have replaced the mining investment boom, but it’s nothing like it: that’s because the results of it — apartments — are not productive assets like LNG plants, mines and ports.”

    Ah, but he is wrong, wrong, wrong. House price growth produces *more debt* which produces more *house price growth*. This is the debt machine that now powers our new FIRE+services economy. We don’t need anything else.

    Those selling the houses for a houseload of someone else’s debt, walk away with insane amounts of money. Normal money that is counted the same as any other dollar in circulation. It can be spent at shops. It can be spent overseas. It can be used to grow wages (but curiously, it doesn’t). It can be supplemented with more debt and used to buy more houses, inflating their prices and all those around them, so more debt can be secured against all the surrounding houses at their new prices. Usually this is the case.

    And if the locals run out of debt capacity for whatever reason; not enough capital gains, reduced working hours, rapidly inflating costs of living and stagnant wages, then the RBA waltzes in and pulls on the interest rate lever and makes more debt available at the same price, or, they fly in a few plane-loads of foreigners with bags of money from who-cares-where, and who aren’t afraid to spend it, to keep it all going.

    So, keep the debt machine running. Surely our “leading business journalist” can’t be that naive?

  12. With 3yrs of the lowest interest rates in history the RBA has bailed-out the debt peddlers and the speculators and bailed-in the prudent and the working poor.
    There is no evidence this will not continue to be the case.

    • bailed-in the prudent

      this is what pisses me off. My dad is a child of the depression and was always suss of debt, that rubbed off on me.
      but I shoulda geared up, even when units were 6* wage

  13. I’ve no idea if is Kohler will be proved right or wrong wrt longer term export revenue growth , however what I can say, with some certainty, is that this statistic just doesn’t matter. My reasoning is simply that the next Australian recession will be created by a liquidity trap rather than revenue shortfalls.
    It just won’t matter what’s happening on the export front, because some time soon a hard nosed banker somewhere will decide that loans to Aussie banks are risky. This will likely be as a result of moderate falls in Apartment closings causing cashflow problems at our biggest construction companies. Once apartments stop clearing our whole local finance system will gum up quicker than a constipated geriatric (to use a metaphor that Kohler might understand).
    The banks will “rationalize” their exposure, we can already see them stepping away from the apartment market and that great unstoppable force, the Chinese buyer will just forget to turn up. That’s all it will take, because there’s no way known that the federal government will be able to step into the breach quicker enough.

  14. this is Alan and Gotti working as a team – Alan says we’re fine, Gotti says we’re stuffed

    then in a years time, whatever actually happens, they can pick the quotes to put in their ads

  15. Gavin HegneyMEMBER

    housing lending rates down about 35% over the last 5 years , borrowing capacity up , house prices up.
    People carried away by the upward momentum and compound the upside .
    Can this rate of interest rate movement be maintained ,?
    When the compounding momentum of people becomes exposed then markets will gain a different perspective .
    Best to be aware of this and be prepared to take appropriate action . It’s not about creating wealth , it’s about making it stick .

  16. Record low interest rates => Record high mortgage debt => Record high house prices
    You asked for it. You got it.