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.


GDP preview

Next week Australia releases December quarter national accounts. I will repeat my quarterly enjoiner that predicting GDP is a fool’s errand (which is why I don’t do it). There are simply too many opaque and moving parts to make it anything other than a guess. But the major banks all tempt fate with forecasts so find below


Costello propaganda covers QLD asset sales

The Courier-Mail is reporting that the final Queensland Commission of Audit report has been presented to the Government, although the Commission’s website is yet to publish the document. Not surprisingly the report apparently recommends selling ports and electricity assets in order to reduce government debt.  The Australian indicates that the report says it would take 50 years


More tradies on smoko

The HIA quarterly tradie index is out and shows an increasing surplus of skilled laborers, although still modest, through late last year with the headline number weakening 7 points to +22. That is still the most slack since 2009: The latest HIA Trades report for the December 2012 quarter highlights the soft state of the


Manufacturing PMI shows marginal rise

The steadfastly inept Australian Industry Group this morning released its PMI for February and rather than blast the universe with the news that the two and a half year manufacturing depression is ongoing, it cheerfully highlights a marginal improvement in the index: Although manufacturing activity contracted for a 12th consecutive month in February, the pace


Glencore vs the mining boom

No doubt everyone will have heard the reassuring story that the Australian mining boom has three phases. The first was a rise in prices. The second was the investment surge. The third is purported to be the volume surge that follows all of those new mines. Phase 3 has always been questionable in my mind.


MRRT inquiry back on

As Mitch Hooke declares his intention to depart the Minerals Council, the senate is set to investigate his handwork. From the AFR: A Senate inquiry into the mining tax will go ahead after the Greens agreed to amend the terms of reference to remove any mention of strengthening the tax. Greens leader Christine Milne, who


Trade deficit increased in the December quarter

By Leith van Onselen The Australian Bureau of Statistics (ABS) has just released its Balance of Payments – Goods and Services data for the December quarter, which: Provides preliminary quarterly estimates of goods and services data including preliminary quarterly estimates of Chain Volume Measures for goods debits. Preliminary seasonally adjusted quarterly balance on goods and


Paying for Dr No

Regular readers will know that I am no fan of the Gillard government. It was an abomination from birth, conceived in a deal with miners that was a breathtaking betrayal of the Australian public. But that does not mean that all of its policies are bad and should be scrapped. On the contrary, its two


Concrete use surges on mining investment

By Leith van Onselen The Australian Bureau of Statistics (ABS) has just released concrete production statistics for the month of January, which revealed a -22% fall in concrete volumes over the month but a 10% rise over the year. The data is incredibly volatile and no doubt affected by seasonality. As such, it is presented


Treasury admires its image in the mirror

Treasury has reviewed its own forecasting record, presumably in an effort to improve performance. It found that: Budget forecasts of nominal GDP growth exhibit little evidence of bias over the past two decades, with the average Budget forecast error being insignificantly different from zero  over this period. That said, an examination of the patterns in forecast


Do PPPs have a future?

The below article, which has been cross-posted from The Conversation, examines the future of toll road Public-Private Partnerships (PPPs) in Australia. The author is Dr Stephen King, who is an Economics Professor at Monash University. BrisConections has been placed into administration only seven months after opening the Brisbane Airport Link toll road/tunnel. It has not


Why have a flat tax on super?

Please find below an interesting post from economist, Matt Cowgill, questioning the merits of taxing superannuation at a flat rate. Be sure to also check out Matt’s blog, We Are All Dead, which examines a wide range of political and economic policy issues. I can understand why libertarians might favour a flat tax on superannuation


No, the CBD is not the driver of jobs

By Leith van Onselen Much of Australia’s planning policies are based on the presumption that the bulk of the population commutes to the central core for employment. As such there is the desire by planners to limit urban sprawl, which is believed to reduce overall commuting times, resource use and pollution, and the need for


The huge mining growth machine

The RBA has a paper out today that is long and kind of boring for all but the wonks that concludes what intuitively we already know, the mining boom has contributed a lot to growth: This paper quantifies the links from demand for Australia’s natural resources to  activity in other domestic industries by using structural