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.


Fitch downgrades Queensland

I’ve doubted the resilience of the Queensland economy for some time now. Back in April I asked if Queensland was headed for recession on the back of the failing real estate market. Today I note that Fitch has joined me in those doubts. Fitch Ratings-Sydney/Barcelona-26 July 2011: Fitch Ratings has revised the State of Queensland’s (QLD)


The great depression

Glenn Stevens spoke to the Anika Foundation yesterday with a speech called “The Cautious Consumer” and I hate to be a stick in the mud but I reckon he tried to explain why consumers are doing what they are doing but at his and the RBA’s core they just don’t get it.  The RBA is still tied into the idea that incomes are rising and so should spending,


Glenn Stevens on the cautious consumer

Find below the full text of Glenn Stevens speech this afternoon. The Cautious Consumer Glenn Stevens Governor Address to The Anika Foundation Luncheon Supported by Australian Business Economists and Macquarie Bank Sydney – 26 July 2011 Thank you for coming out once again in support of the Anika Foundation.[1] I want also to thank in


The bizarre retail debate

One of my favourite journalists, Adele Ferguson of The Age, today calls for a retail bailout: Other figures show that online spending is going gangbusters. There is an estimated $12 billion a year spent in online retail, but it could be much higher than this. Domestic online sales have been growing at 5 per cent


Producer prices ease, but…

JUNE KEY POINTS FINAL (STAGE 3) COMMODITIES increased by 0.8% in the June quarter 2011. mainly due to rises in the prices received for building construction (+1.2%), petroleum refining (+10.3%) and other agriculture (+7.9%). partly offset by falls in the prices received for industrial machinery and equipment manufacturing (-2.0%). increased by 3.4% through the year


Australian stagflation

Late last week, the venerable Melbourne Institute released its Monthly Bulletin of Economic Trends. In it, the economists of the institute predicted that Australia is headed back to the seventies with a bullet: Policy dilemmas ahead … In contrast to other forecasters, we have cautioned for some months now that GDP growth is likely to be


Don’t mention the savings

Two senior Australian business and economics commentators today make throwaway arguments about the struggles of the retail sector. First, it’s Alan Kohler, who dedicates his column to explaining how retail is suffering from Dutch disease. His argument is as follows: Retailing is the bedrock of the economy, employing about 1.3 million people directly and touching


Households and disleveraging

The RBA released its quarterly Household Finances ratios (B21 XLS table) yesterday, which highlights the following ratios going back to March 1977 (in most forms): Debt to Assets Housing debt to Housing Assets Debt to Disposable Income (total, housing and owner occupier) Assets to Disposable Income Interest Payments to disposable income Instead of waiting for


The coming RBA downgrade to growth

As the debate rages over monetary policy the data continues to paint a picture of a weak domestic economy with  a growth profile which is likely to undershoot the forecasts of both the RBA and Treasury over the remainder of 2011 and into 2012, the Westpac leading index was released earlier today and after a


Leading indicators point south

The Westpac/Melbourne Institute Leading Indicators for May are out and point to more weakness ahead. Growth Rate of Leading Index well below Trend 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 1.6% in May 2011, well below its long


All ahead slow

Interest rate discussion over the past week has been fascinating. Behind the media smoke, bullhawkian economists and commentators have capitulated on aggressive interest rate rises. Most have retreated behind the fallback position of a stalled RBA, in which rate rises are still coming, but later than thought. On the other hand, of course, we’ve seen


Car sales bottom

ABS car sales for June are out and show signs of stabilisation after several months of big falls. Following are the key points: JUNE KEY POINTS TOTAL NEW MOTOR VEHICLE SALES Trend – The June 2011 trend estimate (78 267) has decreased by 1.6% when compared with May 2011. Seasonally Adjusted – The June 2011


Retail’s real struggle

Following my post last week Let Retail Burn, Cameron Murray has followed up with a series of log-scale charts that show real retail sales growth per capita since the early nineteen eighties. Firstly, Cameron offers the overall sales picture (I have added trend lines in red): As you can see, there is an accelerating trend


Inflation expectations up

Missed this yesterday. And in a far too late sop for the bullhawks, the Melbourne Institute Inflation Expectations Survey for July registered a slight rise. But just to show how bogged down we are in carbon tax mania, most of the analysis dedicated itself to next month’s effects. The median expected inflation rate, reported in


Let retail burn

The MSM is full of shock and awe at last night’s David Jones profit warning. Farifax and News are as bad as one another. Of course, this is absolutely NO surprise to MB readers, who have known all year that retail is in the gun. The question now is should the sector be bailed out


Is a rate cut coming?

Weak global markets, fears about European defaults, a weakening global economic outlook and business and consumer confidence that is very weak have all conspired to fundamentally change the market’s expectations about the course of interest rates in Australia. Here are a couple of charts which show what the market is now pricing into the interest


Lending finance not bad

ABS Lending Finance for May is out and the news looks better than Consumer Confidence suggests. All major categories (with the exception of leasing) rose modestly, with business finance looking strongest. These figures look more robust than the RBA’s credit aggregates for business lending, which showed a flat result for May overall. Nonetheless, there has


Consumer confidence smashed

The Westpac/Melbourne Institute Consumer Sentiment survey is out and boy it looks like Australians really do not like their new economy. Excerpts with commentary below. • The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 8.3% in July from 101.2 in June to 92.8 in July. This is a surprisingly weak result. This is the lowest level for


Pitchford makes a comeback

I make no secret of my disdain for the Pitchford Thesis, that doctrine that says that current account deficits (CAD) don’t matter in an era of floating exchange rates, so long as the resulting debt is in the private sector. This was the notion that led Canberran policy-makers to turn a blind eye to Australia’s


NAB Survey: Retail hits GFC levels

The June NAB Business Survey again makes pretty ordinary reading with Australia’s so called two-speed economy, other wise known to the sane as Dutch Disease, turning virulent. Here’s the commentary: Domestic sector struggling to gain momentum as confidence slumps. Forecasts for growth lowered and rate rises delayed – reflecting current slowdown and, in the medium


Housing finance recovers a bit more

ABS Housing Finance key points above. I’ve graphed results by state below: All states showed some level of ongoing recovery from the early 2011 hammering but all, with perhaps the exception of Victoria, are still looking very anaemic with most states showing monthly housing finance commitment levels first seen a decade ago. When we dig


Are services economies sustainable?

Sam Burmingham, founder and editor of the WeMoney Newsletter, has written a thought provoking article on his blog questioning the sustainability of service-based economies. Sam’s article is provided below for your reading pleasure. As always, comments are welcome. A couple of week ago Ross Gittins wrote: If ever there was a time when it’s obviously stupid


Next week’s data – Housing finance to dominate

With the first week of the new financial year over, we stumble into a new round of announcements and data releases to digest, analyse and consider and move towards the next corporate earnings season. The big kahuna for next week will be the Labor Government/Green Party announcement on a carbon price policy on Sunday. Here’s


Charting the RBA

The RBA has released its monthly Chart Pack and like last month’s release, I’m going to have a look at this impressive data set for MacroBusiness readers. A warning, its chart heavy (obviously). The Chart Pack is divided into 16 categories, but let’s concentrate on a few, looking first at the economic “god” of GDP


ABS Employment Report analysis

The ABS employment report remained volatile in June with the headline increase of 23,400 jobs, which was ahead of market expectation of a rise of 15,000, consisting of a large swing between part time to full time employment. The unemployment rate remained unchanged in both seasonally adjusted and trend terms at 4.9%. while the trend


Unemployment steady at 4.9%

The ABS has just released the monthly Labour Force Survey results for June. From the media release: The ABS reported the number of people employed increased by 23,400 to 11,455,200 in June. The increase in employment was driven by an increase in full-time employment, which was up by 59,000 people, three quarters of whom were


Arrivals and Departures for May

The ABS has released the May Overseas Arrivals and Departures data, which comprises a summary of monthly data by category of movement. For visitors arriving and residents departing short term, the intended length of stay, main purpose of journey, principal destination (departures) or country of usual residence (arrivals) and state and territory in which most


Engineering activity up 3.8% in March quarter

The ABS has released the Engineering Construction Activity data for the March quarter, which contains value of engineering construction work done, commenced and yet to be done, classified by state or territory, commodity (roads, bridges, pipelines etc), sector (public/private) undertaking the work, and sector for whom the work is being done. VALUE OF WORK DONE,


RBA Statement dissected

The Statement accompanying the announcement of the RBA’s decision not to move rates this month has just been released and from our point of view it is a very dovish insofar as the RBA spends most of its time talking about downside issues with only inflation as a risk to higher rates. I still think they are struggling with


Trade surplus, Vehicle sales down

Two more data sets released today: First, June motor vehicle sales data released by the Federal Chamber of Automotive Industries (FCAI) show a fall of 11.6% than the prior corresponding period (i.e June last year), although this has been put down to supply constraints from the Japanese earthquake. A highlight was an increase in locally