Australian Economy

The “miracle” Australian economy (with its famous run of 24 years without a recession) is an amalgam of pre-modern and post-modern industries with very little in between.

Most economies run at least partially upon the productivity gains produced out of manufacturing and ‘making things’ but in Australia productive investment is supplanted with commodity exports (which make up half of exports) and the recycling of the resultant income is deployed as cash flow for borrowings offshore to pump house prices.

The former step is basically the selling of dirt, a pre-modern activity. The second step is managed via the sophisticated use of derivative markets and is essentially a post-modern activity.

Not that GDP cares given it is only the mindless measure of whirring widgets.

However, both of these activities systematically reduce economic competitiveness by inflating both input costs and the currency. “Dutch disease” by another name. This continuous “hollowing out” of productive activity means the broader economy relies heavily upon the non-stop import of capital, either in the form of debt or in the form of assets sold to foreigners, to generate ongoing income growth.

So long as the underlying income from dirt keeps flowing then the leveraging into house prices that supports consumption can continue, supported by both tax distortions and government spending.

If, however, the dirt income flow halts the hollowing out of modern industry will leave the Australian economy very exposed to a current account adjustment. We saw this in the global financial crisis but the flow of dirt income was restored sufficiently quickly to prevent any deep adjustment.

A second risk is that the debt accumulation simply becomes overly onerous for the underlying economy to service, also resulting in a current account adjustment. Well north of $1trillion of the debt is owned externally and household debt is a world-beating 186% of GDP so this is a real risk.

It is offset by a relatively clean public balance sheet that deploys fiscal stimulus in times of economic stress. However, in recent years, as both of the two above risks have increased, the public balance sheet has deteriorated as well, setting Australia up for a famous adjustment to end its famous bull run.

MacroBusiness covers all apposite data and wider analysis of these issues daily.

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Victorian Treasurer unveils $6b emergency stimulus package

Victoria has received a grim economic forecast as it heads back into lockdown after the Andrews government reimposed stage three COVID-19 restrictions. State Treasurer Tim Pallas said the unemployment rate was expected to peak at 11% per cent with an extra 270,000 people unemployed after being revised up from 9%. Pallas has also revealed additional

26

COVID-19 a “middle-class disaster”

Middle-class professionals in inner-city suburbs have been hit hardest by the COVID-19 downturn, according to consulting firm Taylor Fry. This is because income support like JobSeeker and JobKeeper don’t make up for losses of employment income: “You’ve seen in the last few weeks, thousands of jobs lost in accounting, legal and professional services firms,” [Taylor

4

TAFE: the forgotten victim in higher education war

Over recent weeks, we have witnessed incessant lobbying from universities over funding, whereby they have demanded a return to the Gillard Government’s failed demand-driven system: Universities face turning away hundreds of thousands of students next year as applications to study surge but available places remain fixed… Professor of education policy at Melbourne University Frank Larkins

10

The Australian consumer is drowning

The latest private sector credit data from the Reserve Bank of Australia revealed that the stock of personal credit, which was already in terminal decline, collapsed by 10.2% in the year to May – the biggest plunge in recorded history: As shown above, this decline in personal credit growth easily exceeds the troughs of the

3

UBS: Government debt to hit 80% of GDP in 2021-22

Via the excellent George Tharenou at UBS: Govt Econ Statement to forecast only modestly negative GDP for 19/20 & 20/21 The Australian (Commonwealth) Government will release an Economic Statement (ES) on July 23. Channel checks indicate it will 1) update economic forecasts for a two-year period (20/21 and 21/22), rather than the usual 4-year budget

27

Unions demand JobKeeper for temporary migrants

Luke Hilakari, secretary of the Victorian Trades Hall, has called on the Morrison Government to extend JobKeeper and include temporary migrant workers: “Now more than ever it’s crucial that JobKeeper is extended beyond the arbitrary September cut-off date. It should also be expanded to include all migrant and casual workers who have been locked out,”

6

The great NBN jobs cull begins

For the past several years, MB has warned that the completion of the National Broadband Network (NBN) rollout on 30 June 2020 would cause significant job losses across the Australian economy. We’ve gotten our first taste, with NBN Co announcing that it would axe 800 jobs by the end of the year: CEO Stephen Rue

15

RBA Charts the COVID-19 Depression

by Chris Becker It’s my favourite time of the month – checking out the latest content from the RBA Chart Pack! Let’s dive in…. First it’s all about the GDP’s, all in the toilet for the biggest economies as COVID-19 bites: Meanwhile in Australia, the trend has been down for years: And in the last

18

Memo to Josh Frydenberg: Tax cuts are the wrong stimulus

Yesterday, Treasurer Josh Frydenberg flagged that he would bring forward legislated tax cuts to simulate the economy: Personal income tax cuts for middle income earners worth up to $2565-a-year are likely to be brought forward to help boost spending, the Treasurer Josh Frydenberg has revealed… “There are three stages to those legislated income tax cuts

41

Luxury car sales surge to record high

While annual new car sales have collapsed for 27 consecutive months, hitting their lowest level in a decade: CommSec’s luxury car sales index rebounded to its highest level ever in June; although they were still down year-on-year: Sales of luxury marques hit peak levels of 106,658 units in the year to December 2016. But from

17

Melbourne braces for mass business closures

The sudden six week lockdown of Melbourne has shocked business owners who are now looking at the real possibility of permanent closure. Any businesses reliant on face-to-face contact are now in trouble, including all cafes, restaurants, pubs and bars, beauty salons, gyms, etc. Many of these businesses were already teetering on the bring following the

9

Tourism and aviation industries demand government support

Business leaders and unions are demanding urgent support for the tourism and aviation sectors after government data revealed the industry lost almost $6 billion in three months during the pandemic. International tourism spending was down almost $4 billion or more than 27% for the March quarter compared with the same time last year. The greatest

13

Victoria faces $12b economic hit from new lockdown

With Victoria accounting for around one quarter of the nation’s economy and Melbourne making up 20% of the nation’s population, Commonwealth Bank head of Australian economics, Gareth Aird, says the six-week lockdown in Melbourne is likely to reduce Australia’s GDP growth by about 1% in the September quarter. While the economic cost of the lockdown

26

RBA holds for July

by Chris Becker At its latest meeting the Reserve Bank has held its cash rate at the record 0.25% low. Australian dollar flitted immediately with the 69.50 level but is coming back after tapping out just below the 70 handle earlier today (and in time with my “Aussie could go to 80cents” post!) Reserve Bank

6

Jacinda Adern opens door to Trans-Tasman travel bubble

New Zealand Prime Minister, Jacinda Adern, has opened the door for a trans-Tasman travel ‘bubble’ between Australia (ex-Victoria) and New Zealand by September: New Zealand Prime Minister Jacinda Ardern has reiterated that the billion-dollar tourism trade trans-Tasman bubble could go ahead in September with “safe” Australian states such as Queensland… Travel industry veteran and co-chair

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Hospitality industry cries “skills shortage”

Despite record unemployment, bosses in the hospitality industry claims they are struggling to fill vacant positions, often having no applicants for advertised jobs. According to the above interview, the hospitality industry is highly reliant on temporary migrant labour and as many of 200,000 of these workers have left Australia due to COVID-19. This has left

13

Australia’s services economy dies

The Australian Industry Group (AIG) today released its Performance of Services Index (PSI), which shows that Australia’s services sector is dead as a dodo: According to AIG, the PSI fell “0.1 points to 31.5 points in June 2020 (seasonally adjusted), indicating another serious contraction in activity in June and at a similar pace to May.