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.

8

Queensland’s cyclone

Cyclone Yasi has been upgraded to a Category 5 storm ( the highest level ) and on current estimates is expected to hit between Cairns and Innisfail at around 10pm tonight. The size of this storm is overwhelming, and the bureau of meteorology has announced that this is largest recorded storm ever to hit Queensland. Weatherzone

11

Holy cash cow, Batman!

Oh yes, ladies and gentleman, fresh from the RBA, that’s another monthly moonshot in Australia’s terms of trade for January. That means: Over the past year, the index has risen by 49 per cent in SDR terms. Much of this rise has been due to increases in iron ore, coking coal and thermal coal export

6

Queensland’s water bill

A cyclone the size of the Northern Territory is currently bearing down on North Queensland. The emergency broadcast system sent an SMS to every Queenslander last night and according to the Queensland Premier Cyclone Yasi will hit the north Queensland coast with greater ferocity than devastating Cyclone Larry. Thousands of residents, as well as patients at Cairns hospital, face

2

Get yourself a hard hat

Some boom. According to Bloomberg: Australian manufacturing contracted in January for a fifth straight month as measures of inventories, wages and supplier deliveries declined, a private survey showed. The manufacturing index was 46.7, compared with 46.3 in December, the Australian Industry Group and PricewaterhouseCoopers said in a survey released in Canberra today. A number below 50

26

The great disleveraging

The RBA’s credit aggregates for December were out yesterday and as always make interesting reading. Owner-occupier mortgage debt expanded at an annualised rate  of 7.3% seasonally adjusted. Investor mortgages grew at 4.8%. Personal debt shrank at 4.2% annualised and business at 4.1%. All four of these figures are showing slow declines or low growth plateaus.

4

Don’t give me credit

I have mentioned Veda Advantage previously. They produce a nice report on Australian credit demand on a quarterly basis. Today they released their latest report. For those who understand credit dynamics and its economic effects this report is very concerning. Personal loan enquiries rose 2% year-on-year during the December quarter, the first sign of growth after 11 consecutive

14

Mother Nature is not finished

As Julia Gillard attempts to convince everyone that the flood levy is the “best thing for the country” I have to reprint the following lines. “It is not true to say to Australians that there is a big pile of money there that somehow I could just go and use,” Ms Gillard told the Seven Network today.

10

Macro 101 – Credit effects

In my previous post I talked about the sectoral balance equation which is fundamental to understanding how an economy functions at a macro level.  The function is also useful to understand the likely high-level economic outcomes of  monetary and fiscal policy changes made by a government. If a government is running a surplus budget then they are taxing more

14

Macro 101 – Sectoral balance

I note today that the PM has announced the introduction of a flood levy, some policy changes and cuts of $2.8 billion dollars in government spending including a cut of the national rent assistance scheme. That last point is something I want to discuss in a future post because it will have some interesting effects on housing. All

13

The levy is right

According to the SMH this morning: The Prime Minister, Julia Gillard, has all but confirmed that a one-off levy to help cover the cost of flood damage is on the cards but the bulk of funds will be raised by budget cuts. Speaking before the inaugural meeting yesterday with the 13-member taskforce of business and

3

Fitch’s Freudian slip

FitchRatings recently released its 2011 Australia outlook report on structured Finance.  The overall message from the report itself is not particularly interesting and has received little press. The  report rates RMBS as stable, ABS stable but with some weakness and CBMS Stable/Negative, and has some discussion of the Queensland flooding on the RMBS market. Flooding

2

More on the death of the beer economy

As we mentioned back in early January: There is no sadder story for an Australian than the closing of a pub, but 300 at once should probably signify a national day of mourning. Yet as debt issuance contagion makes its way through the economy, the banks have no choice but to start picking off the

1

More Flood Outcomes

Some more flood related news, after Goldman Sach’s and ANZ‘s $20 billion estimates and Julia’s A team. ABEAR has taken a punt at the export hit THE devastation from recent floods will cost the Australian agricultural sector $500-600 million, while coal exports will take a $2-2.5 billion hit in 2010-11, according to a new report.

4

Consumer confidence takes another hit

Given that consumer confidence was already in the doldrums on the lead up to, and just after Christmas, it is little surprise that we note that one of the largest natural disasters in Australian history has given it a good kick while it is down. The Queensland floods have knocked the stuffing out of consumer

2

Another round of pressure

With one of the Banking overlords about to front up to a senate committee it is about time for the media to remind us all about the “pressure” they are under to raise rates. Australian banks remain under pressure to pass on higher interest rates to customers, as intense competition for funds from cash-strapped European

3

The bill rises, feds have no idea.

As we said when the Queensland disaster was underway. It is becoming an economic reality that the $5 billion price tag will be far too low; Today we note the ANZ is estimating a number 4 times the original estimate. The rebuild effort in the aftermath of Queensland’s floods could top $20 billion, according to

5

Retailers need therapy

From the SMH today: The Retail Coalition is preparing to hand in documents to the securities regulator to officially incorporate its activities, enabling it to hire staff and ramp up its calls for urgent tax reform. The documents will detail plans to establish a new independent company with a constitution, board of directors, company secretary,

11

The frontline of the economy rub.

Today some Brisbane property owners woke up to this. 6 inches of horrible sticky mud absolutely everywhere. Luckily businesses on the river have insurance, which we hope will be paid out. For others it is a different story. Queensland Premier Anna Bligh and Prime Minister Julia Gillard have both implored insurance companies to be flexible

8

Inundated houses

In the year following Hurricane Katrina, something unexpected happened to New Orleans house prices. They rocketed 27% over a period of months. According to USA Today “displaced residents bid up median prices”. This blogger thinks it unlikely that we will see such a dramatic price escalation in Brisbane. The floods are not as serious nor

9

What was it about November ?

We reported in December about the early signs that something interesting happened in November on the home finance front; something that at the time we thought would have forced Glenn Stevens to act against it. Today we note the ABS reported that something definitely did happen. The number of new home loans for owner-occupiers rose

6

Queensland’s Disaster

Last week we asked readers to give there opinion of the Queensland floods and the effect on the economy. It was obvious that everyone, including us, thought this was going to be an utter disaster from an economic perspective. However at the time we had no idea of just how tragic this event would become.

9

Another Commodities Bubble?

Between mid-2007 and late 2008, the price of all tradeable commodities skyrocketed, headlined by oil reaching nearly $US150 per barrel in July 2008. At the time, fundamental economic forces and demand and supply were being blamed for the sharp rise in commodities prices. Take, for example, this explanation from Jeffrey Harris, chief economist of the CFTC, the US commodities futures

5

Is Australia Running out of Luck?

An interesting article appeared in yesterday’s Sydney Morning Herald entitled “Slugging it out over our future direction” (hat tip to John Murray for alerting me to it). In the article, investment ‘experts’ are asked to make predictions on the Australian economy for 2011. While a number of analysts are fairly positive on China and the