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.


Deleveraging pulse unchanged

Westpac’s February Red Book is out and shows some interesting results following the two rate cuts. For me the most significant chart is the following: That’s a fair drop in the appeal of straight savings but only a commensurate rise in the appeal of paying down debt. Shares and houses very much still on the


Model vs reality in health care funding

There is a detailed academic debate surrounding health care funding and provision in Australia (as there is globally). But the debate is clouded by observer bias – by the relatively wealthy senior academics, government officials, and consultants, who provide the analysis in the policy-making environment.  If everyone involved feels burdened by their own choice to


Who cares about Labor?

I haven’t made much reference to the Labor Party’s leadership struggle. There is a reason for this and it boils down to this: who cares? The paper’s are chock full of references to “declines”, “blows” and “sappings” of consumer confidence resulting from the infighting. the SMH is typical: AUSTRALIA’S business leaders have hit out at


Leading indicators below trend

My least favourite indicator, the Westpac/Melbourne Institute Leading Indicator, is pointing sideways this month at weakish growth: The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which  indicates the likely pace of economic activity three to nine months into the future, was  2.3% in December 2011, below its long term trend of 3.0%. The


Wages growth beats expectations

By Leith van Onselen The Australian Bureau of Statistics (ABS) has just released the labour price index for the December quarter. According to the ABS, in trend terms total wages (excluding bonuses) increased by 0.9% over the quarter, with private sector wages rising by 0.9% and public sector wages increasing by 0.7%. Over the year,


Western Australia must invade!

There is something very wrong with the east coast media when it fails to report the following from the WSJ: Resource-rich Western Australia state will create its own form of sovereign-wealth fund to help store away earnings from the sale of vast quantities of iron ore and minerals to Asia, the region’s premier said Tuesday.


Small business bankruptcy jumps

According to Dun and Bradstreet in their latest Business Failures and Start-ups Analysis (full report at bottom of post), the number of small businesses that went bankrupt over the last 12 months has jumped by 48%, although the December quarter of last year did improve slightly from the September quarter. However, the main trend in


Is our economy just a case of your mood?

Some weeks ago I pointed that there was a growing gap between the government’s rhetoric on the economy – that we’re exceptional owing to the mining “boom” – and the reality of the economy for the vast majority of the population. I made the point that the government’s economic narrative had hit a wall given the


The working man’s paradise

By Leith van Onselen On Friday, Houses and Holes wrote an interesting article on how the Australian economy appears to have informally adopted aspects of the German ‘kurzarbeit’ system of employment rather than the ‘slash-and-burn’ approach of US laissez faire capitalism: The basic difference is that Germany has a formal system of automatic stabilisers called


You want productivity? Sack management

Australia’s falling productivity figures are starting to unleash a strange kind of panic, helped along by the shift of Michael Stutchbury from The Australian to the Australian Financial Review. The implication of much of this frenzy is that we are paying people too much, and if Australian industry is to survive then we either need


Roy Morgan: ABS job figures “defy belief”

From Roy Morgan this afternoon and presented without comment: Yesterday’s ABS unemployment estimates (showing January unemployment dropping to 5.1%) defy belief — and common sense. The constant stream of companies announcing retrenchments in the early stages of 2012 are a clear sign that the ABS figures are diverging from reality. Roy Morgan’s unemployment estimate (10.3%,


Two speed jobs (continued)

Following on from today’s earlier post on Australia’s Two speed jobs market, reader, Nick, alerted me to the ABS’ breakdown of aggregate hours worked by state, which supports the theme that Australia’s labour market is running at two speeds. Unlike my earlier post, which compared the growth in total employment, and showed Western Australia, Queensland


Two speed jobs

Following on from my latest posts (here and here) on the Australian Bureau of Statistics (ABS) employment figures, I now want to take readers through a quick analysis of the divergence of employment growth that has developed between Australia’s mainland states. The below charts split-out employment growth into states where positive growth was achieved in


Parko meet petard (updated)

Regular readers will know that the Treasury Secretary Martin Parkinson and I disagree on many things. And that tradition continues today with a speech last night given at the opening of ANU’s new Centre for Economic History. The nub of my disagreement with Dr Parkinson is captured here: Indeed, I cannot count the number of


Australian ‘kurzarbeit’

As the Unconventional Economist describes today, yesterday’s employment number although excellent contained one dark spot, a big fall in hours worked. The trend in hours worked has also very clearly been down through the last quarter of last year: The unemployment rate, however, has essentially been unmoved. I can think of two explanations for this.


The jury is still out on unemployment

Yesterday’s upbeat employment data left many readers questioning the veracity of the alternative Roy Morgan Research employment survey, which registered a very large jump in unemployment in January (see here and here). While it is true that the results for January were contradictory, I believe it is too early to discount the Roy Morgan numbers,


Roy Morgan Consumer Confidence eases

From Roy Morgan: Consumer Confidence has fallen to 115.7pts (down 1.3pts in a week), according to the Roy Morgan Consumer Confidence Rating conducted last weekend (February 11/12, 2012). Consumer Confidence is now 6.2 points lower than a year ago, February 12/13, 2011 (121.9). The decrease in Consumer Confidence is due mainly to Australians being more


Under the employment hood

As Houses & Holes reported earlier, the Australian Bureau of Statistics (ABS) this morning released the labour force data for the month of January and it was very good. In seasonally adjusted terms, total employment increased 46,300 (0.4%) to 11,463,000. Full-time employment increased 12,300 persons to 8,063,100 and part-time employment increased 34,000 persons to 3,400,800.


Employment strong

JANUARY KEY FIGURES Dec 2011 Jan 2012 Dec 11 to Jan 12 Jan 11 to Jan 12 Trend Employed persons (‘000) 11 446.8 11 448.5 1.7 0.2 % Unemployed persons (‘000) 627.5 623.7 -3.8 3.3 % Unemployment rate (%) 5.2 5.2 0.0 pts 0.1 pts Participation rate (%) 65.3 65.3 -0.1 pts -0.5 pts Seasonally


Lowe omits China

There’a another speech today by the RBA, with Deputy Governor Phil Lowe addressing CEDA on the forces driving the economy in the year ahead. It’s fairly run-of-the-mill stuff: structural adjustment, high exchange rate, mining boom, tradeables and housing weakness etc. Two parts of the speech caught my eye. The first was the section on risks,


Welcome back Kohler

By Leith van Onselen Back in 2004, Alan Kohler penned a ripping article in the SMH on the pernicious impact that the Howard Government’s decision in 1999 to halve the rate of capital gains tax (CGT) had on Australian house prices: Five years ago Treasurer Peter Costello told Australians: “Work for a living and we’ll


Consumers breath a sigh of relief

The Westpac–Melbourne Institute Index of Consumer Sentiment index is out and increased by 4.2% in February from 97.1 in January to 101.1 in February. This is decent rise on the month: And not a bad result for rate cuts. Though smaller than the bounce in 2008 and in 2006 when the RBA stopped tightening. But confidence


NAB Survey going nowhere

The NAB Survey for February is out (didnt we just have January?) and shows a very mixed bag: So, confidence and conditions improved a little more but remain in the doldrums. Employment remained depressed and at levels suggesting job losses. Profitability tanked but at least labour price pressures eased. NAB itself reckons: Overall business confidence


The king and his coins

As many of my readers may know I consider myself a pragmatic chartalist. For those of you who aren’t quite sure what a chartalist is I will let wikipedia tell you, as its explanation is as good as any. Chartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as


The twin pillars of our discontent

As the absurdly overdue angst about the dollar and manufacturing jobs gathers intensity and the incredibly overblown angst about bank interest rates prepares to enter blowoff, one can only wonder about where everyone has been and why everybody treats these as separate issues. These two pillars of discontent are the base for our entire economy.


Credit on the nose

Earlier this month, the Reserve Bank of Australia (RBA) released its credit aggregates data for the month of December, which revealed that overall private sector credit is growing at the slowest pace since the 1990-91 recession, with mortgage credit growing at the slowest rate in the dataset’s 34-year history: Yesterday, we received further confirmation of


Three ugly options for manufacturing

The AFR editorial takes the high hand to the PM today over manufacturing subsidies: Asked if there was an obligation on the car industry to become efficient so that it would not need subsidies in the future, Prime Minister Julia Gillard declared yesterday that the media completely misunderstood what the government was doing. But at