Several commenters have asked me to explain how I see an Australian sovereign wealth fund and resource rent tax actually working. Several others have questioned the wisdom of an SWF held offshore when Australia runs a current account deficit (CAD). That is, so long as we invest more than we save, we don’t have any money
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.
Back in April I questioned whether Queensland was heading for recession on the back of stalling credit issuance and a falling housing market. Later in that month I noted that the Victorian government was also showing similar signs of weakness. To complete the trifecta I note today (h/t Lorax) that New South Wales has also caught the same
Whilst there’s no doubt that the carbon tax debate has weighed heavily on the popularity of the Gillard government, this chart from Roy Morgan makes me wonder if it isn’t actually the RBA campaign to “make room” for mining that isn’t killing the government. Note the orange circle around the trend break.
What a shocker. New home sales down 8% in July after an 8.7% fall in June. The index of new home sales is now below the levels reached during the GFC. From the HIA: New home sales suffered a sharp decline for a second consecutive month in July 2011 said the Housing Industry Association, the voice of
As we know, the economic mandarins of Canberra have targeted manufacturing for extermination to make way for booming mining investment. To me, this is profound economic irresponsibility. Without an industrial base, no nation can expect to be consequential. There are three reasons for this. First, the notion that services can carry the load does not
From The Australian this afternoon: UNION leader Paul Howes has attacked the Reserve Bank and Treasury for allowing interest rates and the dollar to skyrocket. The Australian Workers Union boss called for a change in the RBA board’s make-up, saying the current directors had allowed rates to remain high for too long, and lashed the
Yesterday Paul Kelly wrote at The Australian that: The crisis now engulfing Australian manufacturing has been long predicted and much foreseen yet the inescapable impression is that our decision-makers have been taken by surprise and are scrambling to do something. …Yes, the government has been acting. The critique, however, is it has not acted enough.
Here’s some good news. Today’s ABS Construction Work Done report for the June quarter showed decent activity in regular building work – housing and commercial realty – and stratospheric activity in engineering construction, which is all those major projects in mining: The boom is most obvious in the private sector but public sector is
Honestly, boring! After yesterday’s Battelino nothing speech, I’ve now managed to wade through Treasury Secretary Martin Parkinson’s effort last night at The Shann Memorial Lecture. Titled “Sustainable Wellbeing – an Economic Future for Australia” the thing is truly soporific, worthy of some Platonic form of bureaucratic perfection. The speech began poorly, citing a series of
Yesterday’s disappointing Battelino address – which seemed to have no purpose beyond blaming the banks for the rates overshoot (I thought the RBA took bank hikes into account?) and having a bit of a whinge about how hard central banking is – was followed by a Q&A session. And, here it is. (h/t the Lorax)
Last night MB hosted a stonking bare-knuckle debate following my Can manufacturing seize its opening? post. One of my main reasons for writing the post was to expose the political economy in which we find ourselves. By that I mean what is currently accepted as reasonable behaviour in the relationship between government, business, the media and
Suddenly there’s a little momentum behind the notion that to save manufacturing, Australia needs to manage its boom better. From the SMH today: The wave of job cuts in the steel industry, blamed on the high dollar, has reignited calls for a sovereign wealth fund to rein in the exchange rate. After BlueScope Steel yesterday
It seems that the Australian Industry Group has finally gotten my message and has sloughed its genteel suasion of policy in favour of a full-throated roar for protection. The campaign is a macroeconomic gamble and may do nothing to alleviate members suffering. But, at least the manufacturing “crisis” I have been calling for has arrived
Poor, poor manufacturing. It’s on the ten steps to doom: 1. Resources boom drives up the dollar and crushes competitiveness. 2. Canberra consensus embraces manufacturing’s destruction in the name of “adjustment” towards greater resources output. 3. Australian Industry Group (AIG) adopts a genteel approach to defending its members from annihilation. 4. Ken Henry proposes byzantine resource
One of the more interesting, persistent, rancorous and important debates that transpires here at MB, is the degree to which the mining boom is shared with the broader economy. I actually set out to answer this question a couple of days ago and was some way into a post when I discovered a new piece of
Yesterday, in a post about some long term housing data, I added an M3 chart that got a bit of attention. For those who don’t know, M3 is a broad measure of money in the Australian economy including all types of deposits in the lending institutions. As “loans create deposits” M3 is a good proxy
Well, obviously. But exactly what form it takes is open to question and fresh from the farm, Paul Bloxham of HSBC, takes the question on in a comprehensive new report. According to Bloxham, we aren’t ill at all (just as we have no housing bubble). However, we do face the following challenges: First, through banking
ABS average weekly earnings is out and shows wage pressures in the pipeline in the first half of the year. As you can see from the chart above wages appear to be bouncing off the bottom. The RBA would not like this. In the below table, green is at or below the national average
The Westpac/Melbourne Institute Leading Indicators Index is out today. I’ve criticised this index before because some of its components look obsolete, but as you can see, it has a pretty decent track record of anticipating trend changes in growth: And there’s not much doubt about what it’s signaling ahead today: weakness. The annualised growth rate
The next time someone tells you we need a rate hike to stop a wage price cycle, clip them over the ear. The ABS has just released the June quarter Labour Price Index and it’s eased a touch to 0.9% from 1% in the March quarter. And this is before the dramatic falls we saw in
Tracey Watts from the Third Wave Group yesterday alerted me to a research paper by Gavin Putland from the Land Values Research Group that examines the relationship between recessions and property prices in 41 countries worldwide. It offers the following key findings: A downturn in the property market, especially in turnover (sales) of properties, is a
As all economically literate folk know, only productivity growth can make you rich in the long run. As all economically literate Australians know, we’ve got none of it. In this magnum opus prepared for the RBA conference, Saul Eslake delves into why that is the case. Productive reading to you!
The Melbourne Institute is out with its quarterly Wages Report and chalk it up as another data point showing that the labour market has shifted from strength to weakness: Total pay growth over the 12 months to August 2011 slowed sharply, to 2.9 per cent from 5.1 per cent in the 12 months to May. Wage
Last night, the US blog, Calculated Risk, had an interesting argument about whether or not “event” shocks have a different effect on consumer psychology than do more enduring economic shocks. He produced the following table to make the point that the recent debt-ceiling debacle was an event-driven blow to confidence that is likely to be
From the ABS this morning comes July new car sales with a big bounce. Obviously there’s a seasonal aspect to but equally so, it was bigger than usual, coming after months of weakness. In part, there may be a snap back from the tsunami related delays for Japanese cars but there were no tax-related changes