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.


Is Australia turning Japanese?

Last week the RBA finally lowered its growth forecasts for the year ahead but it did so largely with a grain salt, still forecasting a pretty aggressive range of between 2.5 and 3.5%. Tomorrow night, the Federal government will release its Budget for the year ahead and, as Ross Gittins suggests today, will no doubt


Reserve Bank of WBC cuts 0.37%

By Leith van Onselen Just in, Westpac Banking Corporation (WBC) has cut its variable mortgage rate by 0.37%, which follows the Bank of Queensland’s, National Australia Bank’s, and the Commonwealth Bank of Australia’s announcements that they would reduce variable mortgage rates by 0.35%, 0.32%, and 0.40% respectively. WBC also announced that it would cut interest


NAB online retail index eases in March

Growth in online sales eased in March (vs. spike in Feb) – up by 19% yoy – in line with trends from last 6 months: For the 12 months ending March 2012, Australia’s total online spending was around $11 billion. This level is equivalent to 5.1% of traditional bricks & mortar retail spending (excluding cafés,


Will the PSI shock pass?

So, to put some context around yesterday’s horrendous Performance of Services (PSI) index, I’ve drawn the following chart of the history of the major components. As you can see, outside of the GFC, the collapse of the April PSI is without precedent in its ten year history. For comparison, check out the small shock delivered


Foreigners divide over Australian miracle

From Business Spectator/AAP today come some flattering comments from IMF President, Christine Lagarde: Australia’s renowned economic leadership will continue to extend its global influence in years to come, the head of the International Monetary Fund says. IMF Managing Director Christine Lagarde told the Global Foundation’s Australian summit that the nation had always shown “real leadership”


Fitch applauds bank margin expansion (updated)

From the AFR this morning: Australia’s banks have received support from a major credit rating agency to withhold part of the Reserve Bank of Australia’s super-sized interest rate cut. After Commonwealth Bank and the online arm of National Australia Bank yesterday became the latest lenders to pocket part of the cut from ­customers, Fitch Ratings


Is Australia heading for recession?

Two things happened yesterday that suggest to me that the Australian economy could be headed for recession. The first was the collapse of the First Fleet trucking company and the second was the release of the Australian Industry Group’s Performance of Service Index (PSI) which slumped 7.4 points. Houses and Holes covered it well in


Something just snapped in the economy

The Australian Industry Group Performance of Services (PSI) for April is out and shows a precipitous drop: The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of


Garnaut warns of end to commodity super cycle

Professor Ross Garnaut has published a seminal paper on the future demand for resources we can expect to emanate from China in the Agricultural and Resource Economics Journal and the news is not terribly bright. Below find the article’s abstract. Below that a longer version with the section of the paper that matter displayed and


Dr Hewson wants rates at 2%

From the AFR: Former federal opposition leader John Hewson says the Reserve Bank of Australia should continue slashing interest rates so they are in line with other developed economies. A day after the RBA cut the cash rate by 0.5 of a percentage point, to 3.75 per cent, Dr Hewson said it would be better for


Veda sees growing demand for business credit

From Veda late yesterday comes a trend that is consistent with this year’s RBA credit aggregates: SYDNEY, Australia, May 01, 2012 – The results of Veda’s Commercial Credit Demand Index for the first quarter of 2012 show that while overall business credit inquiries increased in the first quarter, with +8.8 per cent growth compared to the


Victoria slashes and burns (FHBs)

From the AFR, here is a summary of today’s Victorian austerity Budget: ■ Surplus of $155 million this year building to $2.5 billion in 2015/16 ■ Weak forecast of economic and jobs growth ■ Departments required to find a further $180 million in savings ■ Cutting 600 public sector jobs taking total cuts to 4200


Manufacturing ugly

The April PMI is out and ouch: Manufacturing activity declined sharply in April after having dipped in March following expansions in the first two months of the year. The seasonally adjusted Australian Industry Group-PwC Australian PMI® fell 5.6 points to 43.9. (Readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the


Austerity beckons for Victoria

By Leith van Onselen Over the past two weeks (here and here) I have warned how the Victorian government is under increasing pressure from the state’s sharply slowing property market, which is acting to reduce growth and employment and has blown a $1.1 billion hole in the State Budget. Now it has been reported that the Victorian


Roy Morgan Business Confidence falls

From Roy Morgan today: Confidence among businesses in Australia increased for six consecutive months to January 2012 when it reached 118.7, but has now experienced its second month of decline and currently sits at 108.9 in March 2012. This indicates that ongoing economic uncertainty continues to cause concern for Australian businesses. These are the latest


Palmer to sink Swan with Titanic?

Or something like that. From the AFR: Queensland billionaire mining magnate Clive Palmer is preparing to run against federal Treasurer Wayne Swan at next year’s federal election. Mr Palmer said he would seek pre-selection for the Queensland Liberal National Party in the marginal Brisbane seat of Lilley in a bid to enter federal parliament. Mr


TD monthly inflation simmers

Just to throw a spanner in the works, the TD securities/Melbourne Institute monthly inflation gauge for April has come in pretty warm: The TD Securities – Melbourne Institute Monthly Inflation Gauge rose by 0.3 per cent in April, after a +0.5 per cent rise in March. According to Annette Beacher, Head of Asia-Pacific Research at


Private credit growth flat in March

By Leith van Onselen The Reserve Bank of Australia (RBA) has just released the private sector credit aggregates data for the month of March: Total credit provided to the private sector by financial intermediaries rose by 0.4 per cent over March 2012, after rising by 0.4 per cent over February. Over the year to March,


Roy Morgan Consumer Confidence off the mat

I haven’t bothered with the Roy Morgan Consumer Confidence measure for a few weeks because the moves have been quite small. However, there’s a little rebound developing with three up weeks in  a row: Consumer Confidence is at 112.4pts (up 0.7pts in a week) and up for the third straight week, according to the Roy


DEEWR job vacancies rise

The weirdness of Australian employment data continues today with skilled job vacancies rising again. Despite the general feeling of gloom, both the seasonlly adjusted and trend series are now rising: Monthly Change Increased by 2.6% to 88.5 (Jan 2006 = 100) Increased in six of eight occupational groups Strongest rises recorded for Machinery Operators and


Kohler revises history

If there is one thing that gets the old MB goat, it’s a bit of historical revisionism. Alan Kohler gives us an epic dose today in his Double the egg on the RBA’s face: The Reserve Bank’s economics department had a bad year in 2011, and as a result the board is now high and dry


Victoria confesses

By Leith van Onselen Earlier in the week I warned how the Victorian economy and Budget are being placed under increasing pressure from the state’s sharply slowing property market, which is acting to reduce growth and employment whilst hammering the state’s tax take. Today, we received additional confirmation of Victoria’s plight, when it was revealed


Soc Gen tells Aussies to buy gold

Courtesy of FT Alphaville, comes the following hatchet job on Australia from Society General analyst, Dylan Grice: When you scratch the surface of the Australian ‘miracle’ you don’’t just find an unmiraculous commodity super-cycle: you also find an equally unmiraculous credit super-cycle as well. A credit bubble built on a commodity market built on an


Fairfax to merge titles with Business Spectator?

From Ad News: Fairfax Media and Alan Kohler’s media independent, which houses Business Spectator and the Eureka Report, are in advanced discussions about forming a new unit which would include BRW and Smart Investor under Kohler’s chairmanship. A deal is yet to be inked but AdNews understands both sides are enthusiastic about the prospects, which


Here come the rate cuts

By Leith van Onselen As summarised earlier by Houses and Holes, the Australian Bureau of Statistics (ABS) this morning released the Consumer Price Index (CPI) data for the March quarter 0f 2012, which showed an absence of inflationary pressures in the Australian economy: According to the ABS, headline CPI rose by only 0.1% in the


What inflation?

And as expected, risks were on down side. 0.1% on the quarter. What inflation? MARCH KEY FIGURES Dec Qtr 2011 to Mar Qtr 2012 Mar Qtr 2011 to Mar Qtr 2012 Weighted average of eight capital cities % change % change All groups CPI 0.1 1.6 Food and non-alcoholic beverages -2.1 -2.5 Alcohol and tobacco