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.

34

Ageing and asset prices

Following on from my previous article, which discussed the adverse impact of Australia’s ageing population on consumption expenditure, I now want to turn to the likely impact of population ageing on asset prices. Much of this analysis will again draw upon the Australian Bureau of Statistics (ABS) long-term population projections, which provides detailed estimates of

39

Ageing to punish retail

In 2008, the Australian Bureau of Statistics (ABS) released long-term population projections for Australia under three scenarios: High growth scenario (Series A), which assumes an increase in the fertility rate, higher net overseas migration than existed in 2008, and an increase in life expectancy; Medium growth scenario (Series B), which largely reflected the trends in

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42

Those that read Douglas Adams will recall that the answer to the ultimate question – life, the universe and everything – was 42. This chart was my attempt to recreate that answer: The idea of this chart was to support my notion that retail sales (purple line) drives everything in the Australian economy and that

7

Mining capex booms on

The bullhawk’s bible is out. ABS Private Capital Expenditure. Here’s the headline release: MARCH KEY POINTS ACTUAL EXPENDITURE (VOLUME TERMS) The trend volume estimate for total new capital expenditure rose 3.3% in the March quarter 2011 while the seasonally adjusted estimate rose 3.4%. The trend volume estimate for buildings and structures rose 2.6% in the

35

Retail gloom will deepen

Earlier this week I posted an article, The housing-retail link, which discussed the positive feedback loop (“wealth effect”) caused by changes in house prices. This article argued that changes in housing values are a leading determinant of household consumption expenditure, consumer confidence, employment and growth. That is, when house prices rise (fall) in value, households feel

10

Have trowel, will travel

The March quarter ABS Construction Done Survey (8755)  is out: MARCH KEY POINTS VALUE OF WORK DONE, CHAIN VOLUME MEASURES TOTAL CONSTRUCTION The trend estimate for total construction work done rose 0.3% in the March quarter 2011. The seasonally adjusted estimate for total construction work done rose 0.7%, to $42,326.6m, in the March quarter. BUILDING WORK

2

Leading indicators strong

The quarterly Westpac/Melbourne Institute Leading Indicators are out and have come in strong, up from 4.7% to 5.3%. Find the full results below. Here also is a graph with the index’s internals: Looks like nearly all of the increase comes from a big jump in “overtime worked” and a little from improvements in the US.

29

Saul cracks the mining tax nut

How’s this from Saul Eslake today: The resources super profits tax, as originally envisaged, was (among other things) impractical and relied on a commercially unrealistic assumption that financiers would believe a government promise to refund 40 per cent of the costs of failed mining ventures. But its replacement, the minerals resource rent tax, is arbitrary

14

NCCP bites credit cards

I have spoken about NCCP many times before in the context of housing and motor vehicle finance. In terms of housing it seems to have had quite a measurable market affect, in terms of vehicle finance it just seems to have simply annoyed the people who have to fill in the extra paperwork. This outcome

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The housing-retail link

Feedback loops are an important concept in finance and economics. In a nutshell, positive feedback loops are pro-cyclical in that they act to make an economy more volatile by accentuating booms and then busts. By contrast, negative feedback loops are counter-cyclical in that they act to reduce volatility and make an economy more stable by

39

The states push back

In a recent post about the Budget I mentioned that Treasury has previously over estimated the taxation take for the federal government and therefore seem to be underestimating the pressure that large amounts of private sector debt is exerting on the economy under the current fiscal and monetary settings. This led me to make the following

40

Parko poses conundrum for self

Martin Parkinson, the new Secretary of the Treasury, gave an excellent speech last night. Gone was the uber-bullishness on China and India that has characterised Treasury rhetoric since the GFC and it was replaced with a recognition that we’re in for cycles in China and at times, it’ll be painful. The Australian covered these things well enough.

6

Labour prices kybosh June

Tomorrow we get the release of the AWOTE measure of wages which is widely known and probably more commonly watched than today’s wage cost index which was just released. The WCI is a little more obscure so it probably worth explaining what the ABS says it measures: The wage, non-wage and labour price indexes measure

19

Consumers give up on future

A day after the most hawkish RBA Minutes that anyone can remember, Westpac’s Consumer Confidence is only going the other way: The fall for May was moderate but it’s now a major downtrend. Not to mention the expectations component, which is falling off a cliff.  Can the RBA really be thinking of hiking in this environment? The

10

Lending finance solid

The ABS has released March Lending Finance. It shows strengthening business lending and stabilisation in conmsumer lending after three months of heavy falls: MARCH KEY POINTS MARCH 2011 COMPARED WITH FEBRUARY 2011: HOUSING FINANCE FOR OWNER OCCUPATION The total value of owner occupied housing commitments excluding alterations and additions fell 1.7% in trend terms and

26

Jawboning is the new black

Regular readers will know that I have little time for the complaints of vested interests. But, one can’t help noticing just how many are out there talking down their circumstances just now. Don’t get me wrong, MacroBusiness has led the nation’s understanding of the economies’ current travails, and there are losers, contrary to the post-GFC

13

Predictable duds

ABS has released Housing Finance for March and Car Sales for April. First up Housing Finance, which we knew from other indicators was going to come in weak, and it did: MARCH KEY POINTS VALUE OF DWELLING COMMITMENTS March 2011 compared with February 2011: The trend estimate for the total value of dwelling finance commitments

26

Employment thumps the bullhawks

The total number of people employed in Australia fell by 22,119 in April.   This is the third time in the past 5 months we have seen the total number of people employed in Australia fall. Yes, that’s right, the 3rd time in 5 months.   The market was looking for a gain of 17,000

22

Housing’s Budget

For almost a year now I have been warning about the Australian market. It became clear quite some time ago that the falling rate of credit issuance towards housing and the demographics of Australia where going to lead to downward pressure on prices. Most recently I have been stating that I can’t see any new

4

Trade bounce

The trade balance roared back in to surplus in March as exports surged 9.2% over the month, outpacing the 1.2% rise in imports. The surge in exports was drive by an 11% jump in non-rural goods exports which account for two thirds of total exports. While imports were mixed with intermediate imports climbing 7.5% while

9

NAB survey goes to the hawks

The NAB April Business Survey is out and it’s got something for everyone. For the rate doves, the lead Business Conditions Index softened: And the internals dropped pretty substantially: However, two other key indexes for the RBA are strongly inflationary. First and foremost, labour: And employment: In sum, I would say that despite the weakness,

28

Retail sales unsurprisingly poor

Those poor bullhawks.  That strange creature – half housing bull, half rate hawk – must be having a few doubts. Personal crises even. Retail sales for March are in and look, well, crapola. First from the ABS itself: I will add that on a monthly basis there were a few eye-opening falls for different segments. Department stores

13

April car sales down 4.5%

Adam Carr won’t be happy. He’s relied on growing car sales in part to rationalise his intense campaign for rate hikes. Westpac has just released a note on the April sales figures from the Federal Chamber of Automotive Industries and it’s into reverse I’m afraid: Westpac Economic update Australia: new vehicle sales down 4.5% in

16

An awfully bland miracle

The RBA made reference to the likelihood of a negative print when Q1 GDP is released on the first of June so I thought I would visualise what a negative number. Without positive revisions to previous quarters this would take the annual rate below 2%: While we were the only developed nation to avoid a

11

Ray of light for manufacturing?

Today AIG PMI  shows manufacturing still in recession in April. However, there is a the hint of a trend change in both the the headline index and its internal measures. It is slow progress and nobody should be breaking out the champagne, expecially since the dollar has not stopped rising but there is slow progress towards expansion.

29

Take a chill pill

My kingdom for a rational media. Today’s selection of economic commentary, from interest rates to the Budget and carbon taxes is so full of amphetamines that one is tempted to conclude that everyone is still high from last night’s Logies. From the top, we have a piece from Alan Kohler that makes no economic sense:

8

RSPT anniversary

Sinclair Davidson has a terrific insight today into what transpired in the RSPT debacle for the Rudd Goverment. Much of the piece is derived from freshly released FOI documents: It is now possible to reconstruct much of what was happening within government and the bureaucracy in the run-up to the announcement of the RSPT and

29

Victorian troubles

In my recent budget analysis piece I spoke about public final demand. Forecast 6: Public final demand, having risen strongly in 2009‑10, is forecast to moderate in 2010‑11 and 2011‑12, reflecting the unwinding of the Government’s fiscal stimulus measures and a broader moderation in spending growth across other levels of government. Analysis: I am going