FIRE sector vampire continues to suck economy dry

By Leith van Onselen

Last week’s national accounts release for the September quarter confirmed that Australia’s FIRE economy – Finance, Insurance and Rental, Hiring & Real Estate Services – continues to eat its host, surging to a new record high (12.0%) share of the Australian economy (see next chart).

ScreenHunter_16596 Dec. 10 07.10

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_16597 Dec. 10 07.11

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 July quarter:

ScreenHunter_16598 Dec. 10 07.12

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_16599 Dec. 10 07.13

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_16579 Dec. 09 07.29

Along with the rise in the ratio of mortgage debt-to-GDP to an all-time high 96% of GDP as at September:

ScreenHunter_16547 Dec. 08 14.52

The banks have also ramped-up their exposure to offshore funding over recent years – particularly short-term – although it did fall slightly in the latest quarter from record high levels:

ScreenHunter_16600 Dec. 10 07.41

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

ScreenHunter_16601 Dec. 10 07.43

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

ScreenHunter_16602 Dec. 10 07.49

With overall housing credit growth still expanding at 6.4% in the year to October 2016 – much faster than nominal GDP (+3.3%) – the FIRE economy is set to continue consuming the real economy, as is household debt.

It’s called the “dumb bubble” for a reason.

[email protected]

Comments are hidden for Membership Subscribers only.