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.
It’s a dour line-up today and I was going to give you all a break from the steady drumbeat of recession talk but, sadly, I’ve just received more of same from the excellent folks at Forecast. In addition, I notice that the usual suspects are engaging in spruikalicious drivel on the back of Gerry Harvey’s
Thanks to Cameron Murray for producing the following scatterplot chart revisiting the question of the relationship between the growth of mortgage credit and retail spending growth. As you can see, my earlier chart was misleading. When scatterplotted, any direct correlation is quite low. I’m pleased to advise that Cameron will be joining MB next week.
ABS short term arrivals and departures for July are out and its up for former and down for the latter. There is a hint of a trend change for visitors so a glint of hope for tourist operators. Hard to believe it’ll be sustained with the dollar where it is but you never know. Less
Over the past couple of days, I noticed a correlation in the trends between housing credit growth and retail sales growth that is worth a mention. Of course, at MB, we’ve long established the link between house prices and retail sales, but here is a pretty clear illustration of the link between mortgage creation and
There’t no doubt that Australian capital investment intentions are booming. The good news is that in the latest round it was the broader economic sectors, including manufacturing that drove all of the jump in intentions. Here is the total chart: You’re looking at the farthest bar on the right. That’s now the full year capex
The PMI is out today and confirms that the manufacturing recession that has been running for a year is deepening. The Australian Industry Group (AIG) describes conditions thus: Conditions in the manufacturing sector deteriorated further in August with the seasonally adjusted Australian Industry Group-PwC Australian PMI® down a slight 0.1 points to 43.3. It remains
Retail sales for July are out and beat estimates, rising 0.5% in July against expectations of a 0.3% rise: Sales Ex-Food was only up 0.3%, as food rose 0.8%, and is now actually down 0.5% over the past 12 months: Of the other components, Household goods were flat, Department stores were up 1.2%, Cafés and
Everyday at MacroBusiness we endeavor to cover a wide range of topics about the Australian economy that are either unreported or misrepresented by the mainstream media. One of the major themes since we began, just 7.5 months ago (I know, it does seem longer), has been the changing face of the Australian economy as private sector credit
Nobody enrages me like Gittins! Not even Pascoe. Sadly for me, the two Fairfax commentators today engage in an awful double-act of cavorting on manufacturing’s grave. Let’s begin with Gittins!: And the fact is that, throughout most of the 20th century, we diverted a fair bit of our income from agriculture and mining to subsidising our
Well…forgive the headline. Mining making us less “productive” would be more accurate. I’ve certainly been less than nimble in bringing to your attention a new study by the Australia Institute into Australian productivity. It was released six days ago but better late than never. And what a fascinating study it is. Explosive even: The recent debate
The RBA credit aggregates for July are out this morning and it’s a mixed picture with a small uptick in business lending, falling growth in mortgage credit and outright falls in personal credit: Total credit growth is completely stalled: And credit for housing has hit a new Y/Y growth low: Both investors and owner-occupiers are
Above is a time series chart from today’s ABS Household Income, Income Distribution release. The blue line is gross average household income. The red line is eqivalised disposable income, which the ABS describes as: Disposable household income adjusted using an equivalence scale. For a lone person household it is equal to disposable household income. For a
Those who support Australia’s exorbitant house prices and new economic model of Quarry Australia usually rationalise that support with figures showing that household income growth is strong and widespread. Well, no longer. The ABS has just released its biannual Household Income and Income Distribution report and the results are a shock. From the report, the 2007/08
ABS Building Approvals managed a small gain of 1% In July, short of the 2% rise that the market was expecting however approvals remain 15% below the same time last year: The marginal increase actually masked the underlying weakness in the series as the gains were entirely driven by a 77% increase in public sector
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
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
