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.
It is not raining on the Aussie economy right now, it is pouring. As we’ve been saying for some time, the public infrastructure surge that has driven what we called the “Botox Boom” in the Aussie economy for two years is now over. Via Deloitte: Deloitte Access Economics Investment Monitor: infrastructure spending set to peak
Via UBS: Home sales collapse to 21-yr low; very negative for renovations & consumption Home sales declined further, slumping to near the lowest level in 21 years. The pace of falls accelerated from a trend of -10% y/y, to around -16% now. The turnover rate (sales divided by stock) collapsed to a ~record low recently.
Via CoreLogic comes the full January house price report: The first month of the New Year has seen a continuation in the broad-based housing market weakness with every capital city apart from Canberra recording a month-on-month fall in dwelling values. Full report.
Missed this yesterday. Napolean Perdis this time: “I blame a lot of factors, from greedy landlords who will not allow us out of leases and who then charge us ‘de-fit’ costs on the stores … that’s cost me $3.5 million alone. The malls are dead, there’s no foot traffic, everyone’s buying cosmetics online but the
Via AIG: To be expected given the recent swoon. Full report.
Via Westpac’s superb Red Book: ― Our CSI± composite combines subindexes tracking views on ‘family fi nances’ and ‘time to buy a major item’ with the Westpac Consumer Risk Aversion Index and provides a good guide to spending with a lead of about 6mths. ― CSI± fell 2.4% from 90.7 in Oct to 88.5 in
Via WBC CEO, Brian Hartzer at the AFR: “Let’s be clear: we want to lend. And we have enough capital and funding to ensure we continue to meet the borrowing needs of consumers, small businesses, and commercial enterprises – even in a downturn. “For Westpac, the recent decline in credit growth was due entirely to
The terrible Brazilian mining tragedy that has iron ore prices running wild is something of a Black Swan event for Australia. Iron ore prices are volumes for the year ahead will now be higher than previously thought so we must ask if this changes the path for an economy clearly on the slide. Goldman’s assessment
By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Consumer Price Index (CPI) data for the December quarter 0f 2018, which registered both soft headline and underlying inflation. According to the ABS, headline CPI rose by 0.5% in the December quarter, 0.1% above the September quarter’s 0.4%: However, on an annual
The ABS is out with Dec QTR CPI and it’s still weak: The headline was slightly above consensus so markets got excited but analytical series are all about as scary as facing Phil Lowe in a fist fight. And they are going to weaken from here. Nothing here to prevent a dovish shift in the
The AUD is still stuck in the mid 71s this morning: Bonds are well bid still and trending towards rate cuts: XJO is up solidly: Led by an outrageous mining party as Vale counts its dead. I am still researching the impact of the Vale accident but I can’t see why Brazil would make its
Via The Guardian: Australia has failed to improve on its record low ranking in a global measure of government corruption, prompting renewed calls for a powerful federal integrity commission to be established “without delay and political wrangling”. The most widely recognised measure of public-sector corruption, Transparency International’s corruption perception index (CPI), was released on Tuesday afternoon, ranking
Via the ABC: Economic experts have warned the Government faces a challenge in meeting its new jobs target if it restricts migration, and even if it does deliver on its pledge, Australians may not be the ones to benefit. It follows a similar pledge by Tony Abbott prior to the 2013 election to create 1
Via Westpac: The NAB business survey for December is a headline grabber. Business conditions have collapsed, with the largest monthly fall since the GFC. Declines were broad-based across states and industries. The business conditions index fell by 9pts to be at +2, a below average reading (for the monthly survey, dating from March 1997). Conditions
Via Damien Boey at Credit Suisse: The NAB survey revealed a sharp decline in business conditions in December to a moderate +2 from +11. Confidence was unchanged, at +3. For us, capex intentions are the most significant component of the NAB conditions survey. Capex intentions dropped to +7 in December from +15. Firms still have
The knee breakers are prospering. Credit Corp has issued a rare profit upgrade: Plenty more where that came from.
From Deloitte today: 29 January 2019: Global growth is still sprinting, but it is increasingly showing signs of starting to run out of puff. The US continues to move fast, with its afterburners blasting away off the back of the huge tax cuts of late 2017. Yet that impact will fade, leaving US growth easing
Hoocoodanode? From NAB: Business conditions fell sharply in December, and while caution should be taken when interpreting data around the Christmas/New Year period, this outcome continues the downward trend in conditions over the second half of 2018. At face value, the fall over the past six months suggests a significant slowing in the momentum of
Via The Australian: Scott Morrison and Finance Minister Mathias Cormann have refused to back Defence Minister Christopher Pyne’s claim that a Shorten government would plunge Australia into recession. …When asked on Network Seven if the government was engaging in fear mongering by warning of a recession, Mr Morrison said: “I didn’t say that. What I
Via Chanticleer today: In the final six months of the year, as a violent correction shook global markets and the ASX 200 fell 5.4 per cent, many of Australia’s retail REITs took off. …But last week, Vicinity provided what some in the market are seeing as either a canary in the coal mine for the
With Judith Sloan making perfect sense and no sense at all: By the time I was driving home, a series of rolling brownouts (a cute term for electricity being cut off in whole suburbs) was under way. The chief executive of the Australian Energy Market Operator, Audrey Zibelman, was cheerfully informing us that cutting back
PM Scummo begins his re-election pitch today with a speech based upon fantasy: Labor said we would fail, but we nailed it – 1.1 million jobs within five years and we are now past 1.2 million jobs. Today, I am making a new jobs pledge for our government, to see 1.25 million jobs created over
Which is of course an absurd proposition. But it is true in a certain sense. Higher commodity prices are now irrelevant to the Aussie economy while lower are a danger. Why is this? The Australian economy is a basic two-step machine. First, it makes profits largely from international dirt sales. Second, it leverages that income via
By Leith van Onselen Hot on the heels of the heavy 15% decline in new car sales in 2018, along with the 9% decline in motorcycle sales, Moody’s has released the below chart showing that delinquencies for Australian auto loan asset-backed securities (ABS) has surpassed Global Financial Crisis (GFC) levels: Auto loans are non-revolving with
By Leith van Onselen The Economist has joined the conga-line taking a bearish view on the Aussie economy: [Australia’s] housing market is now one of the most overvalued… Household debt has reached 200% of disposable income… The saving rate is skimpy… House prices have been falling for a year… Australia’s banks may not have been quite as
By Leith van Onselen Yesterday’s ABS labour force release for December revealed a softening Australian youth labour market – i.e. those aged 15 to 24 years old – with both full-time and part-time jobs growth weakening. That said, trend headline unemployment rate remained dead flat in December at 11.3%: Total employment growth for those aged
By Leith van Onselen CBA has released its flash PMI and it signals more Australian economic weakness: The rate of expansion in business activity slowed to the weakest in the 33-month survey history during January as softer service sector growth outweighed a pick-up in the rate of expansion at manufacturing firms. New orders and employment
By Leith van Onselen As summarised earlier, the Australian Bureau of Statistics (ABS) today released its labour force report for December, which registered a reasonable 21,600 increase in total employment and a small fall in the headline unemployment rate to 5.0%, driven by a 0.1% fall in labour force participation. In trend terms, the unemployment
Just in from The ABS: DECEMBER KEY POINTS TREND ESTIMATES Employment increased 23,100 to 12,711,600. Full-time employment increased 11,800 to 8,697,600 and part-time employment increased 11,200 to 4,014,000. Unemployment decreased 3,200 to 670,900. Unemployment rate remained steady at 5.0%. Participation rate remained steady at 65.6%. Monthly hours worked in all jobs increased 1.1 million hours
By Leith van Onselen The Maritime Union of Australia’s national secretary Paddy Crumlin says Labor is likely to pursue coastal shipping reforms if it wins the 2019 federal election. He expects Labor to mandate that cargo ships operating between the nation’s ports must be Australian-flagged, with local crews who are subject to Australian conditions of
