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.
So you want know what drives the bubble? Make sure you’re sitting down because here it is, cross-posted from the always excellent Jonathon Mott at UBS: Work Undertaken Between 7th of July and 4th of August 2017 UBS Evidence Lab conducted an online survey of 907 Australians who had recently taken out a mortgage to buy
By Leith van Onselen ABC Media Watch last night ran a segment deriding Dick Smith for claiming that The ABC is biased on the population (immigration) debate and is disinterested in airing dissenting views that running a mass immigration scheme more than twice as large as the historical average might actually be bad for the
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Dalian is firm today but going nowhere really: AUD is rampaging towards 81 cents: Which is capping Big Iron: And Big Gas: Big Gold is mixed: Big Sleazy is at new lows: Big Spruik is mixed: The ASX is at the brink again of its descending triangle: The rampaging AUD may push it off…
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Please find below a letter from Dick Smith responding to ABC The Drum’s biased segment on Wednesday attacking the Dick Smith Fair Go campaign. Dick has informed us that he went to the ABC headquarters in Sydney yesterday to state his case but was turned back at the door. 7 September 2017 Julia Baird Presenter The
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By Leith van Onselen Wednesday’s national accounts release for the June quarter confirmed that Australia’s FIRE economy – Finance, Insurance and Rental, Hiring & Real Estate Services – continues to eat its host, rising to a new record high (12.1%) share of the Australian economy: Since financial markets were first deregulated in the mid-1980s, the
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By Leith van Onselen Back in April, ABC’s The Drum aired a shockingly biased segment on the population (immigration) debate, which featured three avid mass immigration spruikers (including Fairfax’s Peter Martin) all pushing the Big Australia agenda. Last night, The Drum aired another biased segment defending itself against The ABC’s alleged bias on the immigration
The headlines yesterday were for improving Australian growth as the Botox Boom takes a hold, but under the hood it was ugly. Domestic demand is now hanging by a single fiscal thread and the outlook is for more of the same: Private investment is still shrinking and household consumption is very weak despite a tumbling savings
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