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.

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Ken Henry revisits the RSPT debacle

Peter Martin reports this afternoon from the Tax Summit that: Former Treasury boss Ken Henry has conceded he mishandled the selling of the mining super-profits tax the former Rudd government proposed last year. Addressing day two of the tax summit in Canberra, Dr Henry said his review took for granted that Australians understood the difference

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Retail sales better than expected

Good news on the economic front has been hard to come by lately and for all the talk of a retail spending drought the data this month and last was far from terrible (even if well below historic averages). Indeed this month’s 0.6% increase in retail sales for August matched the upwardly revised outcome for

12

Record exports

ABS trade figures are out today and there’s no doubt about it, August was a cracking month, posting a big jump to record export revenues above $28 billion for the first time and delivering a surplus of $3.1 billion, the second highest ever. The good news came from one primary source, iron ore: As you

29

NSW units approvals rocket

August building approvals are out and month on month approvals nationally jumped 11.4% from a depressed level. Private sector housing approvals remained very subdued, falling 1% m/m and 9.5% y/y. However units approvals rocketed 35%, propelled mostly by a huge jump in NSW. There were also smaller rises in VIC  and QLD but both remain in down

7

Inflation contained for now

Find below the release for today’s TD Securities-Melbourne Institute Monthly Inflation Gauge: The TD Securities – Melbourne Institute Monthly Inflation Gauge rose by 0.1 per cent in September, following a 0.1 per cent decrease in August and a 0.3 per cent rise in July. In the twelve months to September, the Inflation Gauge rose by

24

Manufacturing is getting murdered

Nice. The raging recession in Australian manufacturing is worsening. The PMI dropped to a new cycle low, having been in effective recession for over a year. The internals of the survey are very nasty. 10 out of 12 sectors are shrinking: Capacity utilisation is collapsing, suggesting more job losses are ahead: The rate of new

12

A better Buffett Rule

Recently American billionaire investor Warren Buffet wrote this article in the opinion pages of the New York Times arguing that the super-rich (top 400 personal incomes) have been molly-coddled by tax reforms of the past three decades.  Buffett noted that he only paid an average tax rate of 17.4%, while the tax burdens of his

9

October 3 links: Tax to the max

US Personal Income Outlays decline in August. Economic Populist US BLS preview. Calculated Risk US data this week. Calculated Risk US fundamentals still OK. Modelled Behaviour Greece to miss deficit targets. Reuters So what does the Troika do with this? Slowing consumers. Gavyn Davies China’s bear market roaring. Bespoke Fears of Chinese hard landing grow. WSJ

6

State of the states

Find below Westpac’s “Coast to coast” document for September. It’s a useful note that splits much of the national data, state by state. Here’s Bill Evans overall prediction: On 15 July we downgraded our growth forecasts for the world economy and Australia. Recent developments, globally and domestically, have reinforced our expectations that activity will be

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Credit growth stagnates (updated)

The Reserve Bank of Australia (RBA) has released the Financial Aggregates data for August 2011. Here’s the summary (emphasis added): Total credit provided to the private sector by financial intermediaries rose by 0.2 per cent over August 2011, after rising by 0.3 per cent over July. Over the year to August, total credit rose by

18

Fitch downgrades New Zealand

Below find Fitch’s reasoning for this morning’s downgrade of New Zealand. Let’s not get too cocky with our Kiwi neighbours. So far as I can tell, if China were so slow for an extened period, you could pretty much substitute Australia for New Zealand in every single sentence. Fitch Ratings-Hong Kong-29 September 2011: Fitch Ratings

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Collaborative consumption revolution

Economic downturns provide a massive incentive to utilise the existing capital stock more efficiently. The creative destruction of retail is revealing new ways to optimise floor space and new business models to utilise buildings more efficiently. In downturns households will also consolidate to better utilise their available space.  But this wave of innovation is not

8

New home sales remain weak

New Home Sales for August are out and remained very subdued: The latest HIA – JELD-WEN New Home Sales Report, a survey of Australia’s major residential builders, showed that the number of new homes sold in August 2011 edged up by 1.1 per cent in August following declines of 8 per cent in July and 8.7

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Gittins! endorses catatonic ignorance

In a video that defines the ethos of a generation, Ross Gittins this morning comes clean with his frustration that you are interested in what happens overseas and in the future. As an alternative he endorses blind optimism (or should we call it catatonic ignorance) as the way forward for you and your family. Please watch

19

The creative destruction of retail

The great Australian retail adjustment is happening now at a store near you. Myer Managing Director Bernie Brookes recently announced the retailer’s plans for more serious efforts in online retailing, with $9million set aside to improve Myer’s online presence. Target yesterday sent a letter to suppliers explaining why they are going to pay 5% less

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Budgeting for deflation

Over the last few days the economic managers of our political class have made some very odd statements about exactly what the Australian government should be doing in light of the fact that the economy is beginning to stall. Yesterday the Shadow Finance Minister was interviewed by the ABC and gave the following answers: Andrew Robb

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Why we work too much

A 2010 report from UK think tank New Economics Foundation generated plenty of publicity by suggesting that a 21 hour standard work week would significantly improve wellbeing by giving people more time for family, friends, neighbours, and leisure activities. Interestingly, economist John Maynard Keynes envisaged in a 1930 essay on the Economic Possibilities for our Grandchildren the following situation: Thus for

15

Financial stability my butt

The September 2011 edition of the RBA’s financial stability review came out last week and as usual I like to take a look at the section on household and business balance sheets. I have previously analysed much of this information as part of recent statement of monetary policy, however the latest FSR contains some updated data.

8

Dissecting rising unemployment

While the echoes of the financial crisis bounce off the walls of fiscal stimulus and austerity it seems an opportune time to take stock of labour market conditions. The recent uptick in the headline rate of unemployment from 4.9% to 5.3% over July and August left some mainstream commentators confused.  Indeed, the irrationally optimistic have taken

11

New CPI continues the housing deception

Yesterday the ABS released the new basket of goods weights for the CPI and the Analytical Living Cost Indexes (ALCI).  This draws upon changes agreed during the 16th Series review with weighting revisions in all groups using the results from the 2009-2010 Household Expenditure Survey (HES), which surveys the expenditure patterns of almost 10,000 households

4

Household financial conditions rebound

Missed this yesterday. The Melbourne Institute’s Household Financial Conditions survey for the September quarter rebound from its June plunge. Not surprising given the sudden relief apparent on the interest rate front. Interestingly, housing investment remained on the nose, contradicting the recent jump recorded in the Westpac consumer confidence survey. I think it’s fair to say

30

High savings are the new normal

RBA Assistant Governor, Phil Lowe, yesterday gave an interesting speech on the changing patterns in Australian household saving and spending. In particular, the speech describes some of the possible reasons underpinning the recent rise in Australia’s household savings rate and ponders whether this shift is a temporary phenomenon or likely to be long-lasting. First of all,

22

Central bank independence under siege

The Reserve Bank of Australia’s independence is an illusion.  The RBA exists because the Menzies government passed the Reserve Bank Act 1959 to create it, and subsequent governments, while occasionally tinkering with the operational framework, have seen no reason to abolish it. I have long found it interesting that even relatively minor fiscal decisions of

11

Westpac ACCI Survey thumped

Westpac and the ACCI today released the 200th edition (started in Dec 1961) of their quarterly joint survey of Australian industry and it does not make comfortable reading. Westpac says in the summary conclusion that: This is a survey which is sending a very clear message. It is time for the authorities to ease financial

1

Leading indicators stabilise

The Westpac/Melbourne Institute Leading Indicators are out and show some stabilisation: 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 3.1% in July 2011, around its long term trend of 3.1%. The annualised growth rate of the Coincident Index which gives a pulse

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All hail Swan!

As no doubt many of you are already aware, Wayne Swan has been declared Finance Minister of the Year by Euromoney magazine. As someone who has created and engineered similar types of magazine executions, let me establish first that I really don’t think this is worth the bally-hoo it has received. Such special issues are

13

IMF slashes Australian growth

I am more used to laughing at IMF prescriptions for solving financial crises than I am used to praising their work, but the latest World Economic Outlook is a breath of fresh air in more ways than one. It begins with an admission that the last WEO got it all wrong, something a few Australian

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Revisiting the new economic glossary

Remember readers, some months ago I posted the new economic glossary, which was a set of fresh terms to help describe Australia’s rapidly evolving contemporary economy. Here is the lexicon as it stands: Politico-housing complex The great public/private partnership of the Australian housing quango that has virtually nothing in common with either capitalism or a “market”. Invisopower! The myterious