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.


WA depression rolls on

By Leith van Onselen The June quarter’s national accounts, released yesterday, revealed that Western Australia’s economy remains in a slump, with state final demand registering zero growth over the quarter and falling by 3.8% over the year: Western Australian workers continue to suffer big pay cuts, with real per capita wages & salaries declining by


Peace breaks out with The Kouk

Mirabile dictu, peace has broken out between The Kouk and MB: Let me return the complement before we all blink and say The Kouk’s dovish positioning on the RBA is ahead of most in the market, including Phil Lowe. We’re in this together, I suspect, because we’re mutually disgusted by the war on wages.


Gerry Harvey hearts the population ponzi again

By Leith van Onselen Last week, billionaire retailer, Gerry Harvey, pronounced that Australia would become an “Asian country” with a population of 100 million in the next century, saying there is “not a chance in hell” immigration can be dialed back. On Monday night, Harvey appeared on ABC’s The Business (video above), where he gave


The yawning gulf between wages and profits

By Leith van Onselen Monday’s June quarter Business Indicators release from the ABS, which feeds into the national accounts, confirmed that wages & salaries remain wildly divergent from business profits. As shown in the next chart, real business gross operating profits have boomed over the past year: And this stands in stark contrast to wages


Dick Smith calls out ABC population ponzi bias

Go Dick: Dick Smith is launching an advertising campaign against ABC TV news and current affairs, which he says has warped the debate he has tried to spur over Australian population growth. He claims both Labor and Liberal politicians have told him they agree that Australia needs to cut its immigration intake to avoid future


Apparently, the immigration boom never happened!

By Leith van Onselen Apparently I have it all wrong and Australia is not experiencing a turbo-charged immigration boom after all, according to a long-winded post by Aidan Morrison at the Quixotic Quant Blog [my emphasis]: The Population Ponzi story tells us that sometime in the mid-2000s the Howard government kicked the gate-open to mass


GDP prospects bulge on intravenous Botox

Via Westpac: Public demand is expanding at an above trend pace as governments commit to new investment projects. This theme was evident in Q2. Public demand grew by 2.2% in the quarter, adding 0.5ppts to quarterly GDP. We had expected a contribution of 0.3ppts. Investment jumped 6.7% in the quarter and consumption increased by an


Caixin China services PMI bounces

Caixin service PMI: The Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated that Chinese business activity growth picked up for the second month in a row during August. Furthermore, the latest expansion of activity was the strongest seen for six months, as shown by the Composite Output Index posting 52.4, up


Australia’s terms-of-trade retraces in June quarter

By Leith van Onselen Within today’s dump of balance of payments data that feeds into tomorrow’s June quarter national accounts release was the important news that Australia’s terms-of-trade has fallen (as expected), down by 6.0% in seasonally adjusted terms over the quarter but continuing to rise by 2.0% in trends terms: Over the year, the


West Gate Tunnel: Another costly infrastructure waste

By Leith van Onselen I have noted previously that one of the key reasons why Australia’s high population growth (immigration) is lowering the living standards of existing residents is because of the strain that it places on infrastructure, which inevitably leads to more congestion on roads, public transport, as well as more expensive housing. Basic


Finally, franchise visa rorters bill passes parliament

By Leith van Onselen Two years after the 7-Eleven migrant worker scandal first broke, and the veritable conga-line of stories emerging about the systemic abuse of Australia’s various migrant worker programs, the bill to prevent worker exploitation has finally been passed by parliament. From The Canberra Times: Employers, particularly franchise chains, face stiff new penalties


Services PMI falls

From AIG: • The Australian Industry Group Australian Performance of Services Index (Australian PSI®) fell 3.4 points to 53.0 in August (seasonally adjusted). This signaled continuing growth, but at a more moderate pace than in July and with a greater variation in activity across the sub-sectors. Australian PSI® results above 50 points indicate expansion, with



Via The Australian: The government has been warned of a looming gap in the national electricity supply as coal-fired power stations shut down, highlighting the need for urgent decisions to build new generators that operate around the clock. …The government is shifting its focus to the reliability of new ­energy generators, as well as the


The decade long slump in wages & salaries continues

By Leith van Onselen The June quarter Business Indicators report, released yesterday, includes aggregate wages & salaries data, which according to the ABS measures “gross earnings before taxation and other deductions” and “includes provisions for employee entitlements”. In order to get a better sense of how this data is tracking, I have deflated these aggregate


Mineral and petroleum exploration bounces in June quarter

By Leith van Onselen The Australian Bureau of Statistics (ABS) today released its Mineral & Petroleum Exploration data for the June quarter, which both posted rises. Nationally, expenditure on minerals exploration rose by a seasonally-adjusted $39.3 million (+9.9%) over the June quarter: This increase was driven by WA (+$14.3 million) and QLD (+$10.2 million): The


Inventories suck away GDP

From ABS Business Indicators: JUNE KEY FIGURES Mar Qtr 17 to Jun Qtr 17 Jun Qtr 16 to Jun Qtr 17 % % Sales of goods and services (Chain volume measures) Manufacturing Trend -0.2 -2.7 Seasonally Adjusted 0.9 -2.8 Wholesale trade Trend 0.2 4.9 Seasonally Adjusted -1.6 3.3 Inventories (Chain volume measures) Trend 0.3 1.7