Leith van Onselen BIS Shrapnel was out this week with some startling predictions for the Australian economy and housing markets. It’s worth taking a look, although let’s remember that their recent form on both the economy and housing has been questionable. For example, in July 2010 – near the peak of Australian house prices –
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.
Don’t listen to the gloom and doomsters. There’s a raging job opportunity going in Oz. All you need are two large hands with strong foreams, able to be held at the horizontal for long periods, sometimes decades at a stretch. Please make your CV out to “The Federal Government New Car Plan”. Don’t worry
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At MacroBusiness we have been warning about the Australian policymaker love affair with all things Chinese for some time now. It’s not because we are natural contrarians but rather because we see risks in an over indulgence on any one economic theory or belief, be that overly optimistic (perma-bull) or overly pessimistic (perma-bear). How else did
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Find below a new analysis of the effect of the mining boom on jobs in Queensland by The Australia Institute. This is an interesting take on the net effect of the mining boom on the labour market. It is brief and readable and asserts, using the example of modeling around the QLD “China First” mine,
As you may have noticed I’ve taken an eye off Europe for a short while in order to provide some macro analysis on what is happening in the Australian economy. At present there is a growing gap in the economic conversation in Australia between what is actually happening and the rhetoric…. This post is a
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It’s time to get on my high horse again about the Australian economy and what is not being done by policy makers and the RBA. I live in the Hunter, having worked until recently as the Treasurer of the dominant Financial Institution in the region, in addition to spending countless hours, days and weeks getting
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Recently the Unconventional Economist noted that Alan Kohler has come around to the MB view of the Australian economy. Now, another grey beard of Australian business commentary has given up on Australian exceptionalism: Ross Gittins. Regular readers will know well the chagrin with which MB has observed the work of Gittins over the past year.
By Leith van Onselen The Australian Bureau of Statistics (ABS) has just released trade data for the month of January, and it’s a shocker, with the trade balance moving to a deficit of $673m in January 2012, a turnaround of $1,998m on the surplus in December 2011. The worsening trade balance has been driven solely
It turns out that labouring in the wilderness may not be fruitless after all. The AFR this morning reports that the government is looking at some new tax initiatives aimed at addressing Dutch disease: Treasurer Wayne Swan is facing another battle with the mining industry as the government considers scrapping lucrative tax benefits to fund
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