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.

5

Business indicators soft

ABS Business Indicators are out this morning and show an economy in the doldrums in the December quarter+ DECEMBER KEY FIGURES Sep Qtr 11 to Dec Qtr 11 Dec Qtr 10 to Dec Qtr 11 % % Sales of goods and services (Chain volume measures) Manufacturing Trend 0.7 1.6 Seasonally Adjusted -0.2 0.9 Wholesale trade

23

Australian dollar fears grow among SMEs

From today’s Dun and Bradstreet National Business Expectations Survey: Concern over the consistently high Australian dollar has risen significantly among local businesses, particularly those in retail and manufacturing, according to the latestDun & Bradstreet National Business Expectations Survey. More than a third of businesses, up nearly 40 per cent on last month, expect the high exchange rate to have a negative impact on their operations in the June quarter. The survey also finds that while overall sales and profit expectations remain elevated, anticipated employment levels have declined from levels at the start of the year. According to Dun & Bradstreet CEO, Gareth Jones, businesses continue to remain cautious in response to increasingly conservative consumers and the maintenance of a relatively high local currency. “This caution amongst businesses is increasingly being seen through a focus on consolidation rather than growth,” Mr Jones said. “Small businesses in particular appear to be focussed on maintaining profitability and cash flow by improving margins through, for example, parin back operational costs rather than looking to grow operations through greater investment and expansion of their workforce.” “Clearly, the pressure of a sustained high in the Australian dollar is starting to bite for main street businesses.” Concern over the dollar grew noticeably among retailers, rising 12 percentage points to reach 37 per cent during February. Retailers also downgraded profit expectations, with more than half anticipating slowing demand in the year ahead. This comes amid continued gloom over competition from online sellers, with nearly half of all retailers expecting internet competitors will have an adverse effect on their operations. “Consumers are increasingly savvy and adept at seeking out cheaper alternatives. Businesses need to adapt quickly or risk losing customers overseas,” Mr Jones said. There’s not much doubt about manufacturing declining at the hands of the high dollar. However, the retail Dutch disease meme is less certain. The recent NAB study of retail trends did not show online purchases

7

PSI stumbles in February

As I’ve said before, the Australian Industry Group’s services PMI (Purchaser’s Management Index), known as the PSI (Performance of Services Index), is of questionable use. As the below chart shows, it recorded poor growth in 2010 and better in 2011, which is pretty clearly the opposite of what actually transpired for services. Nonetheless, it is

48

Beware Australian exceptionalism

We’ve seen in the person of Jeremy Grantham that sometimes it takes an external observer to cut through the local fog and understand the risks facing the nation. Today, in an exclusive interview with the AFR, economist Willem Buiter joins Grantham: “Australia is a small, open economy with a floating exchange rate,” Mr Buiter said.

6

Roy Morgan unemployment eases

The Roy Morgan February unemployment number is out and has corrected somewhat, not unexpected for February: Unemployment was 9.7% (down 0.6% since January 2012) — an estimated 1,182,000 Australians were unemployed and looking for work. A further 7.9% (up 0.4%) of the workforce* were working part-time looking for more work (underemployed) — 962,000 Australians. In

0

Arab Bank on downgrade review

From Moody’s late this afternoon: Moody’s reviews Arab Bank Australia for possible downgrade on asset quality pressures Sydney, March 02, 2012 — Moody’s Investors Service has placed the ratings of Arab Bank Australia Limited (“ABAL”) on review for possible downgrade, following weakening asset quality during 2011. Ratings affected are ABAL’s long-term senior unsecured debt rating of Baa2, subordinated debt

1

Underemployment static (six months ago)

After the ABS employment figure from last month I discussed the notion that Australia had taken on the an informal version of the German kurtzarbeit labour system via labour hoarding. That is, when economic weakness strikes businesses reduce hours rather than workers. Today, the ABS released its annual Underemployment Survey which runs up to the September

142

Swan bashes the billionaires

Like Kevin Rudd before him, Wayne Swan has penned his defining missive in The Monthly magazine. It is a long essay and much of it is dedicated to establishing a context for Western societies , especially the US, to debate the rise of elite wealth and the decline of the middle class. You can read

4

The day the earth stood still

Data is the life blood of any economic watcher. Without it we are naked, bereft of meaning. But like life, some days it’s a torrent! Last night I was asleep before my head hit the pillow, exhausted from an extraordinary day of economic data that shook up many presumptions but ultimately left my overall sense of

3

Capex disappoints

The ABS quarterly capex report was out today and disappointed on current spend as well as expected spend outside of mining. First, the details from the quarter past: Trend estimates(a) Total new capital expenditure 38 737 5.9 32.3 Buildings and structures 22 692 8.1 47.4 Equipment, plant and machinery 15 916 2.1 14.7 Seasonally adjusted(a)

2

Manufacturing expansion eases

Not that it was big to begin with but at least we’re still positive: Here’s the details: Manufacturing activity increased again in February, albeit at a slightly slower pace than a month ago. The seasonally adjusted Australian Industry Group-PwC Australian PMI® fell 0.3 points to 51.3. (Readings above 50 indicate an expansion in activity,with the

44

Gina goes off message

Last night, NewYork’s favourite business website, Business Insider, picked up an Australian story that has not gotten that much press here. It was Gina Rinehart’s poem inscribed upon the very earth in the Pilbara: Gina Rinehart, Australia’s richest person, just penned a political poem — and it’s hilarious. Her prose, engraved on a plaque attached to

27

Abbott should look at QLD Libs

There’s actually some sense emanating from a political candidate at the moment. It’s certainly not at the Federal level. But in the Queensland election, the Queensland Liberal National Party leader Campbell Newman is making noises not too far from reasonable. The AFR has an exclusive interview with Newman in which he outlines his economic plan: As

5

And now for the good news: mining

The ABS released the December 2011 quarter statistics for Construction Work Done earlier this morning, falling 4.6% seasonally adjusted from the September quarter. This was 4% below consensus but still up over 9% year on year: BUILDING WORK DONE The trend estimate for total building work done fell 1.5% in the December quarter. The trend

86

New home sales hammered

Please forgive the headline, but the HIA JELD-WEN new home sales report for January is out and the news is so poor despite two rate cuts that I’m sure how else I’m supposed to put it: New home sales began 2012 on a weak note, a disappointing outcome given there was also a fall in

12

Eating out in threadbare clothes

Retail sales for January are out and show a 0.3% seasonally adjusted rise, which equates roughly to the levels of wage growth: However, the trend still looks pretty sick: And the state by state breakup shows that the big states continue to struggle and pretty seriously too: Over longer time frames the pictures is slightly

18

Credit disleveraging continues

The Reserve Bank of Australia (RBA) released the monthly Financial Aggregates data this morning, which incorporate private credit (including housing, personal and business lending) and monetary growth (M3 money supply). Here’s the release, I’ll have the analysis and charts up shortly, the most important thing to note is that housing credit growth is now at

8

NAB blows up online retail meme

NAB has released a fascinating study of online retail and the findings much blow up the “retail as tradable goods sector” meme. NAB has taken its merchant facility data and scaled it up using census measures to draw the following conclusions: The data presents the scope of the online retail  environment. At $10.5 billion, online

38

Australia’s FIRE economy burns

Friday’s Reserve Bank of Australia (RBA) testimony to the House of Representatives Standing Committee on Economics contained some interesting discussion on how the household savings rates of around 10% is the “new normal” and likely to persist well into the future: Mr Stevens: There is no particular science to saying, ‘What is the correct rate

103

All hail Prime Minister Abbott

Today’s Newspoll is fascinating. From The Cupboard: IN the middle of a bitter leadership battle, Labor’s voting support has risen to its highest in a year and Julia Gillard’s personal standing has fallen to six-month lows. …In three-way comparisons, Ms Gillard finishes behind both Mr Rudd and Mr Abbott as preferred prime minister. According to

2

Our great and invisible friend

A quick observation on the appearance of RBA boffins before the Senate’s Standing Committee on Economics last week (find the Hansard below). There was lots of interesting discussion of banks, competition, mortgage rates, unemployment and the adjustment to mining led growth, Europe and its effect on the local economy and the high dollar and its

23

Analyst looks at foot, sees shoe

From a Chris Zappone report titled “Leadership battle damaging says analyst” at the SMH: City Index FX strategist Kara Ordway said the leadership battle is not good for the nation’s investment profile. “What investors want is certainty,” she said. “What the situation is creating at the moment is shaky ground to where businesses are uncertain of

3

MI eggheads raise forecast

Regular readers will know that I follow the Melbourne Institute Monthly Bulletin of Economic Trends, a dour document that is quite useful in keeping the boffins at Treasury and the RBA honest given they are similarly styled economists without the need to gild the lilly. The MI view was much the same as that of

4

Retail renaissance?

David Jones CEO Paul Zahra caused a brief stir in retail stocks yesterday when while announcing half year results he noted: …we did see an improvement in December and January, compared to October and November, which, in turn, were better than August and September. His own stock spiked, as did competitors, amid hopes that retail

3

Roy Morgan Consumer Confidence falls

From Roy Morgan, it’s weekly consumer confidence index fell again this week: Consumer Confidence has fallen to 113.4pts (down 2.3pts in a week), according to the Roy Morgan Consumer Confidence Rating conducted last weekend (February 18/19, 2012). Consumer Confidence is now 7.2 points lower than a year ago, February 19/20, 2011 (120.6). The decrease in

25

Two speed wages

The Australian Bureau of Statistics (ABS) has just released the Average Weekly Earnings (AWE) data for the November quarter.A breakdown of the key changes is below: According to the ABS, on a seasonally adjusted basis, national total AWE increased by 0.8% in the November quarter, to be 3.7% higher year-on-year. Full-time total earnings increased by

34

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

29

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