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.


Macquarie sees “white collar recession”

Macquarie is predicting a white collar recession in Australia, raising its forecast for unemployment to 6%: Our economics team recently moved its unemployment forecasts to 6% on the view that Australia will experience a “white collar” recession. The team sees upside risk to 7% in the event that retail, manufacturing and tourism sectors also decide


New home sales rise from the floor

New home sales have posted a modest 5.5% bounce in October. They are still languishing, however, as shown in the above chart. As Ross “pull no punches” Gittins would say, off to the Pilbara with you builders. Full release from the HIA below: 2011-10 NHSS National Media Release


Swan’s unpopular razor

From AAP this morning: Deloitte Access Economics director Chris Richardson said the government planned to cut spending when the Reserve Bank of Australia (RBA) had cut its cash rate in early November. The RBA cut the cash rate from 4.75 per cent to 4.5 per cent to provide some stimulus for a slowing economy. “What


The mining billionaire

Well, it’s finally happened. Manufacturing (or at least the AMWU) has taken the gloves off in its fight to survive the “adjustment” planned for it by the Canberra/mining nexus. Here’s the website. And the video (h/t the Lorax):


Canberra is fighting the last war

In recent days, Ross Gittins delivered a spirited defense of the Australian Treasury’s embrace of Dutch disease. He based his defense on an endorsement of a speech delivered by the Head of Treasury’s Macro Group, David Gruen. I haven’t seen the speech before today but read it this morning and it’s got some fascinating material.


Australian austerity closes in

From Business Spectator via the AFR and The Oz comes the following news on the Budget this morning: Federal Treasurer Wayne Swan has said that larger than expected spending cuts will be needed to preserve Labor’s promise of a budget surplus in 2012-13, thanks largely to a $7 billion drop in capital gains tax revenue


The rise of cohousing

Cohousing will grow more rapidly in Australia for three reasons – a drive for efficiency including trends towards collaborative consumption and housing densification, the price of Australian homes with substantial downside risks, and the limited scope for personal expression in the design of new attached homes.  Yet social obstacles to this type of venture remain.


We should listen to David Murray (now)

In December 2010, David Murray, Chairman of the Future Fund and former CEO of the Commonwealth Bank, issued a stern warning on Australia’s high level of net foreign liabilities, which had reached nearly 60% of GDP: …the assumption that Australia could maintain a high level of foreign borrowings because the economy was underpinned by the


Prisons dilemma

The ABS released their Corrective Services statistics yesterday.  Below is a key chart showing the relatively flat prisoner numbers.  Indeed Australia’s imprisonment rate has barely notched up since 2001, and compares favourably in global comparisons. While very positive, this data provides an opportunity to reflect on the role of prisons in society.  Recently, the discussion


Roy Morgan consumer confidence up a jot

From Roy Morgan’s weekly consumer confidence number we can conclude that we are a resilient lot! Consumer Confidence rose slightly to 113.1pts (up 1pt in a week), according to the Roy Morgan Consumer Confidence Rating conducted last weekend (November 19/20, 2011). Consumer Confidence is now 9.8pts lower than a year ago, November 20/21, 2010 (122.9).


Construction goes ballistic

The ABS quarterly report, Construction Work Done, is out today and whooshka, there goes there the neighbourhood: SEPTEMBER KEY POINTS TOTAL CONSTRUCTION The trend estimate for total construction work done rose 5.0% in the September quarter 2011. The seasonally adjusted estimate for total construction work done rose 12.5%, to $47,467.3m, in the September quarter. BUILDING


Worst case scenario

Let me begin by saying that I am good fun at a party. Get a few beers into me and I’m even capable of taking over. In a good way that is, having fun with all and sundry, from atop a table. Usually it’s mocking myself because I’ve spent the prior couple of hours advising


Why are there so few boat people?

The contemporary public debate over population growth in Australia has, in my mind, overlooked a crucial question that would help us understand population issues in more depth.  Why is there so little illegal immigration to Australia? If the way illegal immigration is portrayed in the media is anything to go by, many would suspect that


Eggheads still gloomy

Find below the Melbourne Institute November economic forecasts update. Nothing changed from last month, still forecasting lousy 2.4% growth over this financial year and benign inflation. I have to say though, their unemployment peak of 5.2% looks very optimistic to me. Rather out of the blue, they did include this rather provocative little paragraph that


Look to Germany to resolve Qantas

Germany, the current European workhorse, is one of the nine OECD countries without a national statutory minimum wage.  As election time rolls around, Angela Merkel is considering adopting the opposition party’s position on regulating a Germany-wide minimum wage as a political tactic.  Given Germany’s great economic success and historically low unemployment, why bother? Germany has


Population growth has normalised

Yesterday’s Daily Telegraph contained an interesting article on the increasing number of Australians departing Australia permanently: OVERALL migration from Australia has soared to a record high – with 88,000 leaving in the past year, almost half from NSW. The stampede abroad is a 90 per cent increase 10 years ago, figures from the Department of


Praise for good regulation

There is enough bad regulation out there that it really should be newsworthy when good regulation is implemented.  Last week, Stephen King, arguably Australia’s best current economist, presented a report card for Australian competition regulation at a UQ luncheon in Brisbane which highlighted a few of these good regulations. For the bread and butter regulation


Wages boom slipping away

So, the ABS has released its two wages reports now, Labour Price Index (WCI) yesterday and Average Weekly Earnings (AWE) today and the results show a clear slowdown in trend growth. These two measure slightly different things. The WCI is defined as: The wage, non-wage and labour price indexes measure changes over time in the


A tipsy Xmas and houses looking good

Consumers plan a modestly increased Christmas outlay this year versus last and increasingly think that now is a good time to buy a house. Those are two of the findings in Westpac’s excellent November Red Book.  No matter what business you’re in, reading this is worth 10 minutes of your time. It is the defining document


DEEWR jobs report confirms weakness

The signs are everywhere that employment has slowed but, as we know, the ABS figures continue to paint unemployment in a sideways pattern. Today there is yet more evidence that that will not last. From DEEWR Job Vacany Report for October: The Internet Vacancy Index (IVI) declined by 1.9%1 in October 2011, the seventh consecutive


Leading indicators soften

The Westpac/Melbourne Institute Leading Index is out and projects a return to trend growth: The annualised growth rate of the Westpac–Melbourne Institute Leading Index, whichindicates the likely pace of economic activity three to nine months into the future, was3.3% in September 2011, basically in line with its long term trend of 3.2%. Theannualised growth rate of the


Wages rebound despite weakness

The Melbourne Institute monthly wages report is out and sees: Total pay growth over the 12 months to November 2011 rebounded to 3.7 per cent from a modest 2.9 per cent rise in the 12 months to August. Expectations also rose and are now just above the RBA’s inflation target band. According to Dr. Edda


Wild rivers, or wild politics?

Queensland’s alternative Premier, former Brisbane Lord Mayor Campbell Newman, has been on the campaign trail for most of 2011.  Last week he announced the Liberal Party’s position on Queensland’s Wild Rivers Legislation.  He intends to remove three rivers in Cape York from the legislation, which is no surprise given that Tony Abbot announced a year


Credit cards a Christmas treat

The RBA has released its monthly credit card data yesterday (missed it) and to nobody’s surprise credit cards very much remain on the nose. Here is the chart of the various line totals: Usage was up 9% yoy, balances and limits 3% apiece. To give you some idea how slack this demand is, here is


Car sales continue a good run

New car sales in October continued there good run, up 1.1% mom and 4.4% yoy. The strength was broad based too. Here are the key figures from the ABS: OCTOBER KEY FIGURES NSW Vic. Qld SA WA Tas.(a) NT(a) ACT(a) Aust. Vehicle sales (no.) Trend 27 545 23 462 18 769 5 651 9 280 1


More cuts, more credit

From News today comes the following: Billions of dollars in spending cuts will be announced when the Government releases the latest official assessment of the national economy before Christmas. The reductions will be aimed at bolstering the Government’s determination to deliver a Budget surplus in 2012-13. And it will come in the face of persistent


Does the RBA choose the government?

This morning there was an interesting poll result with the Gillard government continuing to enjoy a new upwards trend in the polls. Things are a bit slow this arvo so I spent the last couple of hours making up this chart. It shows the Roy Morgan Two Party preferred measures with rate tightening and easing


Lending finance weakens

SEPTEMBER KEY FIGURES Aug 2011 Sep 2011 Aug 2011 to Sep 2011 $m $m % change TREND ESTIMATES Housing finance for owner occupation(a) 14 528 14 644 0.8 Personal finance 7 072 7 086 0.2 Commercial finance 32 145 32 229 0.3 Lease finance 407 410 0.6 SEASONALLY ADJUSTED ESTIMATES Housing finance for owner occupation(a)


Our economic model is dated

Throughout this year, I have posited that Australia is now a one speed economy – slow. That this has transpired amidst a mining boom has amazed and befuddled economists and media alike. But it’a really not all that hard to understand. Offsetting the mining boom is a huge and unprecedented slowdown in the issuance of


Is Australia complex enough?

Specialisation as an instrument of economic growth is close to an undisputable fact.  Whether there are limitations to this process, I am not sure, but for me there is a more significant question that really needs a satisfactory answer if we are to understand economic growth – if specialisation causes economic growth, what causes specialisation?