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.
By Leith van Onselen The Australian Bureau of Statistics (ABS) today released data on capital expenditures (capex) for the September quarter, which registered a 0.5% seasonally adjusted decline in capex volumes over the quarter and a 0.6% decrease over the year (see below table). While Houses and Holes has already covered the forward-looking capex plans
The ABS is out with September QTR private capex and the news is pretty good: TOTAL CAPITAL EXPENDITURE Estimate 4 for total capital expenditure for 2018-19 is $114,099m. This is 4.4% higher than Estimate 4 for 2017-18. The main contributor to the increase is Other Selected Industries (6.8%). Estimate 4 is 11.3% higher than Estimate
By Leith van Onselen A group of labour academics have written a book, entitled The Wages Crisis in Australia, which bemoans Australia’s anaemic wages growth and offer some policy prescriptions. From The ABC: “The impact of stagnant wages goes further than subdued consumer spending. The resulting precarity in household financial stability is … a potentially
Gotti says we’re getting smashed: This week’s dramatic announcement that the nation had actually achieved a budget surplus was based on high mineral revenues and a housing boom. But Australia is about to be to be taught that in minerals China gives and then China takes away, and that in housing banks gave credit but
By Ross Elliott, cross-posted from The Suburban Alliance: In amongst changing Prime Ministers (again) or our ongoing obsession with all things Trump, there mustn’t have been much room left in the media this year for analysis of interesting jobs forecasts and other economic news. This one missed my attention, but it’s very interesting: the Federal
Via Damien Boey of Credit Suisse today: In our recent article “Crying wolf against the little engine that could”, dated 15 November 2018, we suggested that the pulse of activity growth has faded badly towards the back end of the year. Our activity tracker has been lingering at low levels for some time, consistent with
By Leith van Onselen The ABS has released data on the value of construction work done for the September quarter of 2018, which registered a 2.8% seasonally-adjusted decline in total construction activity over the quarter and a sharp 16.9% decrease over the year: The result easily missed analysts’ expectations of a 0.9% increase in construction
By Leith van Onselen Fairfax’s Clancy Yeates has returned from Chicago where he discovered that the Trump Administration’s lower immigration policy has played a direct role in lifting American workers’ wages: A recurring theme from American business-owners is that it is getting it hard to get the staff they need… this challenge was being made
You can see where the coming Shorten Government is going to go today in Victoria, via the ABC: Victoria’s re-elected Premier Daniel Andrews has unveiled his new front bench, with half of ministry positions going to women. The Andrews Government has become the totemic social progressive regime in Australia. Andrews has done this while the
By Leith van Onselen Sadly, Fairfax’s Ross Gitins has turned into a shill for the ‘growth lobby’, missing the point entirely on why Australians are unhappy despite 27 years of so-called continuous “economic sunshine”. This is according to an online survey of 3,000 people by big business lobby group, the Committee for Economic Development of
Yesterday in response to Gerard Minack’s latest I noted that my base case was not for recession in 2019 but steep slowing to 2% GDP growth or below in H2: The principle reason for this is still high public spending, decent net exports and population growth of 1.6%. I remain much more bearish about 2020
By Leith van Onselen Too often, commentators on the population debate understate the role played by immigration in driving Australia’s population growth. These commentators usually claim that net overseas migration (NOM) accounts for around 60% of Australia’s population increase, whereas “natural increase” (births minus deaths) accounts for around 40%. While this statement is true when
By Leith van Onselen Following on from UBS’ downbeat forecast for Christmas retail sales, illion Data Registries has reported that retailers have “hit the wall ahead of peak sales season”, with “Australian retailers going bust in record numbers”: The latest analysis from illion reveals the sector’s failure rate hit record levels during the September quarter
Weeo, weeo, weeo. The Pascometer is redlining on weak wages: An unemployment milestone last week nearly sneaked past unremarked: In original terms, the Greater Sydney workforce of 2.88 million people recorded an unemployment rate that started with a three for October, the lowest it has been in 11 years. So where are the strong wage
By Leith van Onselen The Victorian Government has released its Victorian Greenhouse Gas Emissions Report 2018, which noted that the state has done a good job in reducing per capita emissions: Victoria’s per capita emissions decreased from 24 to 18.4 t CO2 -e between 1990 and 2016, a period during which the state’s population grew
By Leith van Onselen UBS has forecast that Australian retailers’ discretionary sales will grow by just 1.2% year-on-year during the Christmas 2018 period, compared with around 3% in the last three years. Ben Gilbert of UBS says the expectation of weaker retail sales has yet to be reflected in official data, but that a number
Via BKW: The stock also up with the wider market but, again, I wouldn’t buy it. This is only the beginning of a very big and long dwelling construction shakeout:
Hooocoodanode: The stock is actually up a little at the open on with the wider market but I wouldn’t buy that. Get set for a deepening bear market for discretionary retail:
Earlier this morning I gave an interview with 2GB’s Michael McLaren talking about Sydney’s break-neck population growth and the latest attempt by the so-called “Good Growth Alliance” – the cabal of property rent-seekers – seeking to shut down discussion about lowering immigration to more sensible levels. The interview and discussion runs from around 1:24 to
Via Gerard Minack: There are risks aplenty in Australia, centred on expensive houses, high leverage and low saving. Some investors are more bearish: they see Australia as the next ‘Big Short’. That’s a tail risk, but remember both that there are some macro offsets to housing weakness, and that markets this year have already moved
Via S&P: Australian prime home loan arrears fell in September, according to a recently published report from S&P Global Ratings. The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages, declined to 1.33% in September from 1.36% in August. Arrears typically fall at this point in the annual cycle, though the current arrears level
Via Commsec: • Aussie motorists have an early Christmas present. Petrol prices are falling and have scope to fall even further. In fact, compared with the highs for petrol prices in October, capital city motorists are saving as much as $69 on a monthly basis on filling up the car with unleaded petrol, equating to
Find above an interesting interview with author, strategist and economist Harry Dent by the team at Digital Finance Analytics.
By Leith van Onselen Last week, the Australian Population Research Institute (APRI) released a startling new report arguing that Australian universities’ heavy reliance on overseas students is crushing education standards, is oversupplying accounting, IT and engineering occupations, adding to population pressures in Sydney and Melbourne, and is shaping Australia’s foreign policy. The reality is that the industry
Here is what Crikey’s Bernard Keane wrote last week on immigration: The same policy breakdown that has occurred in other areas of neoliberal policymaking is now occurring on immigration. It’s generating the same response as in other areas. And it has the same causes. Rinse, repeat. Scott Morrison, who only a matter of months ago
Westpac shows today that there is still a lot of downside left in the house price correction: Our last Housing Pulse showed buyer sentiment continuing to stabilise but a further weakening in housing markets suggested other factors were driving things – a tightening in lending standards in particular. Three months on its a similar story
Via Scott Haslem at the AFR: The housing outlook warrants significant caution. The high level of household debt remains a vulnerability, particularly in the event of an adverse shock to the economy and the potential for loan defaults and weaker consumer spending to feed back into weak activity. But Australian banks have substantially strengthened their
By Leith van Onselen Abul Rizvi, a former deputy secretary in the Immigration department, is the latest to blame the population crush afflicting Sydney and Melbourne on foreign students. From SBS News: The real pressure on Australia’s highly populated east-coast cities was driven by a surge in international students, Mr Rizvi said, while the permanent
By Leith van Onselen RBA Governor, Phil Lowe, must live on another planet to be so out of touch. On Wednesday, Lowe warned that white collar workers may soon feel downward salary pressure because of technology and globalisation: To illustrate his point, Dr Lowe said he was aware of “senior executives” in Sydney who no
Via CBA: Australian private sector output growth recovered some ground in November, with sharper increases in both the manufacturing and service sectors. That said, the rate of expansion remained relatively modest. Meanwhile, the rate of job creation eased to a three-month low. There were signs of weakening cost inflation, particularly for service providers, while output
