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.

22

Gerry capitulation

Two weeks ago the well informed crew at Boganomics made the following statement. Just this morning, a stone tablet arrived on Gerry Harvey’s desk, informing him of both MyFind’s effort, and the dotcom crash of 1999. “Two sets of bad news for the broadbands”, mused Gerry. But if, by some miracle, the internet manages to

17

Leigh Harkness on debt saturation

In a follow up to his previous post please enjoy Leigh Harkness’s latest guest post on “Debt Saturation”. Many years ago, I tried to identify the relationship between money and inflation. I could not find a general rule for all situations, but for certain countries who adopted “pure” float, I found that inflation was equal

25

The aliens have landed

An alien has landed in Australia and is confusing the hell out of everyone. That alien’s name is lack of system growth. In the old system, as the pie got bigger, there were no losers, only degrees of winners. Corporations in Australia’s dominant finance, realty and retail sectors could swap 2 per cent market share

4

DJ’s blames Gaddafi

It’s always good to under promise and over deliver. And DJ’s has done just that in their half year result, posting a good result in depressed consumer circumstances of 4.2% profit growth amidst falling revenue. They also reaffirmed full year guidance of 5-10% profit growth. One has to seriously wonder, however, about the above caveat

5

ASIC’s insider

John Durie commented yesterday on likely changes in the leadership ranks at ASIC: ASIC chief Tony D’Aloisio formally advised staff today for the first time he would not seek a new term as corporate plod when his contract expires in May. The staff notice came in the wake of media reports over the weekend that

15

How Japan will hit local growth

I am surprised at the resilience of Australian equities to the global sell-off. Either the local market is confident that the crisis can be contained (for some reason I can’t fathom, it’s behaving irrationally, or, it has assessed any economic fallout from the disaster to be minimal for Australia and already priced in). The only

5

The safe haven meme

There’s more argument today that the Australian dollar is now a global safe haven currency, which, I must admit, agitates my innate cringe gene. Let’s see if there is any evidence. First, the following graph is the last six months of futures movements for traditional safe havens by percentage: The $US is green, Japanese yen is

3

More mangy data

There is more bad credit and sales data out today from the ABS. First, Motor Vehicle Sales: Trend – The February 2011 trend estimate (84 485) has shown a decrease of 0.3% when compared with January 2011. Seasonally Adjusted – The February 2011 seasonally adjusted estimate for new motor vehicle sales (84 122) increased by

10

Employment pop

Following today’s ABS Labour Force data for February, find below a series of charts indicating the state by state breakdown of full time jobs since early 2007. Everywhere other than WA had a nice pop for the month. This is raw data, which is why the aggregate increases are higher than the national figure quoted

4

Bad day for tough words

Houses and Holes noted today that the RBA looks as if it is trying to talk tough on interest rates. I assume that was before 11:30am when the ABS figures for housing finance appeared. JANUARY KEY POINTS VALUE OF DWELLING COMMITMENTS January 2011 compared with December 2010: The trend estimate for the total value of dwelling finance

2

Shocked consumers

In my previous post on Phil Lowe’s speech, I noted that the RBA is hawkish and clearly still concerned that consumers will binge as mining boom income passes through the economy. The killer quote was: Not unexpectedly, this decline in the relative price of manufactured goods has caught the attention of the household sector. In

4

Gittins! goes the full chunder

All right, this blogger is sorry. He’s tried to leave it alone. He’s willed himself to ignore it. But he just can’t let Gittins! get away with today’s technicoloured shocker. According to the paragon of baby-boomer supiority: The more economists examine it, the more they explode the seemingly self-evident truth that we’re living in a

16

Ken Henry’s lucky country

On Friday evening, Treasury boss Ken Henry delivered his final public address before stepping down in March. At the University of Tasmania Giblin Lecture, Henry delivered his magnum opus, a broad review of Australian economic history spanning three centuries (full transcript below, h/t The Lorax). The document is a must read in full, but the

9

Under Embargo

Ever heard of the Forex Factory? How about World Leaders News? Or Tweet Meme? Philippine Times? Quedit? The News List? Odd Bird Collective? These are just a few of the media outlets that considered it worthwhile reporting on comments from Julia Gillard that she was concerned that Australia has a dose of the economic clap

3

The growth zone

The Australian Industry Group has released two surveys in the last few days and boy do they make pretty reading. The first was the manufacturing index, which managed to flop into expansion for the first time in six months. The second was the services index, which continued its now one year slump into recession: Which

7

Labor’s destructive secrecy

The Age today published new Wikileak revelations about the Foreign Investment Review Board (FIRB) and it’s policy vis-a-vis China: Canberra’s foreign investment regulator has privately admitted that it is seeking to limit investment from China in response to political concern about the control of Australia’s strategic resources. Contrary to the federal government’s claims that it

3

Consumer terror

Retail sales for January are out and so are the spruikers. According to the SMH today: Retail sales grew in January as consumers took heart from steady interest rates and a strong jobs market to increase their spending. The volume of sales increased 0.4 per cent in January, up from 0.2 per cent in December,

12

Hats off to McKibbin

MacroBusiness would like to doff its hat to Warwick McKibbin. The current and soon to be former RBA member has embraced the spirit of the Trickster and thrown a big spanner into the works in Canberra’s bull factory. We don’t agree with everything Dr McKibbin has to say, and on some things he doesn’t say

11

Housing ponzi stumbles on

The RBA’s lending January credit aggregates were out yesterday and the reading is fascinating. It is no surprise to regular readers that the rate of credit growth in Australia has slowed, a phenomenon it calls disleveraging. January’s credit was a continuation of the several months before it. Owner-occupied mortgages grew month on month at a seasonally adjusted

7

Wish me luck as I wave you goodbye…

After last week’s bifurcated capex survey from the ABS analysed here, today we have the release of the Australian Industry Group’s own capex survey (see below). And it’s bye, bye manufacturing, with a bullet: Anyone knows that to make stuff these days you need to compete with low cost manufacturers in Asia. To do that,

11

Let’s call it a “super profits” tax

Just how incompetent was the Rudd/Swan team in the last term? Over the weekend, and in the week prior, the following captains of industry and senior officials advocated a sovereign wealth fund to help the Australian economy fend off the effects of Dutch Disease: Glenn Stevens, Governor of the Reserve Bank Roger Corbett, Chairman, Fairfax

5

Capex blowoff

After a string of poor data, the economic cheerleaders have something genuine to celebrate – capex. The local keystone of the endless economic strength thesis is ongoing high business investment, largely by mining firms, as we supply urbanising China and India with raw materials. The following graph is the ratio of capex to GDP going back

6

Clemmed up

  A few weeks ago our regular bank insider Deep T mentioned a few pieces of Australian infrastructure while discussing securitization. Certainly securitization is a process which relies on transferring risk into the hands of the bondholders for it to be an effective and useful financing tool. However, risk transfer does not mean an abrogation of

11

The horror

Forgive this blogger for being a bit slow on the uptake, but it just passed a copy of the AFR as it attempted to leave the office and saw the headline “Mining tax hole tops $100 billion”. $100 billion in a fund would have stabilised our financial system for good. $100 billion wrested from power.

12

Disleveraging and shocks

Yesterday’s quarterly NAB Business Survey threw up a shocker for December. However,  this blogger is more interested in the recently released monthly survey,which shows what a pounding business conditions took in January (find both below): Trading, profitability, employment, forward orders, stocks, exports all smashed. NAB foists the blame onto the QLD floods: Business conditions tumbled 12

4

Funny old NAB

I have been watching the National Consumer Credit Protection legislation for some time now. It seems to be slowly creeping into other people’s radar as well.  “Under the new National Consumer Credit Protection (NCCP) legislation, lenders are being more cautious when lending to the self-employed and small business owners who, unlike PAYG borrowers, do not

7

Macro 101 – Political economics

In my previous Macro 101 post a number of people asked me some genuinely good questions about the functional process of the banking system under in certain scenarios. These questions made me realise just how much more there is to say about banking operations.  But more importantly it also made me realise how important it is

10

Carrion comfort

As usual, the media is beating housing finance data to death with a feather. It’s nothing personal, and this blogger could have thrown a dart to choose which overly-bullish article to deconstruct, but Adam Carr goes further than most so he’s up for a flaming. Using the new ABS housing finance commitments data, Carr argues the