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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The underemployment question

Yesterday’s strong employment numbers from the ABS stoked an interesting debate in the comments about what degree of underemployment Australia suffers. To help the debate along I’ve drawn up the following table from the ABS Underemployed Workers report. It is annual only and from Spetember 2010 It clearly shows two things. First, that labour markets in

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We’ve lost our way

Over the weekend I was reading the local newspaper which contained a 3 page spread about  families who are struggling with day to day life because of the rising cost of living, mostly energy. In the same week it was determined that the new carbon tax would cost Australian families approximately $900/year and oil approaching

11

Leigh Harkness on Bank Welfare

Leigh Harkness is back with his unique perspective on the Australian macro-economy for another guest post, this time on “Bank Welfare”. Banks have prospered under the floating exchange rate system.  They have been able to lend as much as they like without any concern about affecting the balance of payments.  The exchange rate adjusts to

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WTF AIG

Sigh…I’m having an angry week. Regular readers will know that I’m no fan of vested interests. But I make one exception. Right now, the nation DESPERATELY needs a new vested interest body to support the non-resource tradable goods sectors of manufacturing, tourism and education. I can’t remember a peep out of either the education sector

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Why Australians aren’t spending

Robert Gottliebsen today posted an interesting article on Business Spectator providing an insight into why Australians are cutting back on retail spending: Retailers have been looking closely at what is causing stress among Australians and among Australian consumers… Those in lower income suburbs or in areas where there are many high mortgage/low deposit new houses,

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Jobs point to restructure

The ABS released its Job Vacancies for February survey today. The overall release was a slight seasonally adjusted fall. More interesting is the industry split. The first chart below is for sectors with rising job ads for the month: And the second is for sectors with falling job vacancies for the month: This industry sector split

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Leigh Harkness on debt saturation

In a follow up to his previous post please enjoy Leigh Harkness’s latest guest post on “Debt Saturation”. Many years ago, I tried to identify the relationship between money and inflation. I could not find a general rule for all situations, but for certain countries who adopted “pure” float, I found that inflation was equal

25

The aliens have landed

An alien has landed in Australia and is confusing the hell out of everyone. That alien’s name is lack of system growth. In the old system, as the pie got bigger, there were no losers, only degrees of winners. Corporations in Australia’s dominant finance, realty and retail sectors could swap 2 per cent market share

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The economics of government service failure

Today I want to cover a topic that I have not discussed previously. I have often thought about posting on it but it wasn’t until I had a discussion on another thread that I realised how important the topic might be for others. The catch cry of the public is “why does the government waste

15

How Japan will hit local growth

I am surprised at the resilience of Australian equities to the global sell-off. Either the local market is confident that the crisis can be contained (for some reason I can’t fathom, it’s behaving irrationally, or, it has assessed any economic fallout from the disaster to be minimal for Australia and already priced in). The only

5

The safe haven meme

There’s more argument today that the Australian dollar is now a global safe haven currency, which, I must admit, agitates my innate cringe gene. Let’s see if there is any evidence. First, the following graph is the last six months of futures movements for traditional safe havens by percentage: The $US is green, Japanese yen is

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Bad day for tough words

Houses and Holes noted today that the RBA looks as if it is trying to talk tough on interest rates. I assume that was before 11:30am when the ABS figures for housing finance appeared. JANUARY KEY POINTS VALUE OF DWELLING COMMITMENTS January 2011 compared with December 2010: The trend estimate for the total value of dwelling finance

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Shocked consumers

In my previous post on Phil Lowe’s speech, I noted that the RBA is hawkish and clearly still concerned that consumers will binge as mining boom income passes through the economy. The killer quote was: Not unexpectedly, this decline in the relative price of manufactured goods has caught the attention of the household sector. In

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Ken Henry’s lucky country

On Friday evening, Treasury boss Ken Henry delivered his final public address before stepping down in March. At the University of Tasmania Giblin Lecture, Henry delivered his magnum opus, a broad review of Australian economic history spanning three centuries (full transcript below, h/t The Lorax). The document is a must read in full, but the

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Labor’s destructive secrecy

The Age today published new Wikileak revelations about the Foreign Investment Review Board (FIRB) and it’s policy vis-a-vis China: Canberra’s foreign investment regulator has privately admitted that it is seeking to limit investment from China in response to political concern about the control of Australia’s strategic resources. Contrary to the federal government’s claims that it

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Hats off to McKibbin

MacroBusiness would like to doff its hat to Warwick McKibbin. The current and soon to be former RBA member has embraced the spirit of the Trickster and thrown a big spanner into the works in Canberra’s bull factory. We don’t agree with everything Dr McKibbin has to say, and on some things he doesn’t say

11

Housing ponzi stumbles on

The RBA’s lending January credit aggregates were out yesterday and the reading is fascinating. It is no surprise to regular readers that the rate of credit growth in Australia has slowed, a phenomenon it calls disleveraging. January’s credit was a continuation of the several months before it. Owner-occupied mortgages grew month on month at a seasonally adjusted

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The Baby Boomer Bust?

The 21st century will be the century of old age, where declining birth rates meet longer life expectancies. This ageing of the population will affect many areas of the international economy, from consumption and growth to asset valuations.  The impacts from ageing will likely be most acute in Western Nations, although some developing countries, most notably

8

Queensland’s cyclone

Cyclone Yasi has been upgraded to a Category 5 storm ( the highest level ) and on current estimates is expected to hit between Cairns and Innisfail at around 10pm tonight. The size of this storm is overwhelming, and the bureau of meteorology has announced that this is largest recorded storm ever to hit Queensland. Weatherzone

14

Macro 101 – Sectoral balance

I note today that the PM has announced the introduction of a flood levy, some policy changes and cuts of $2.8 billion dollars in government spending including a cut of the national rent assistance scheme. That last point is something I want to discuss in a future post because it will have some interesting effects on housing. All

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Is Australia Running out of Luck?

An interesting article appeared in yesterday’s Sydney Morning Herald entitled “Slugging it out over our future direction” (hat tip to John Murray for alerting me to it). In the article, investment ‘experts’ are asked to make predictions on the Australian economy for 2011. While a number of analysts are fairly positive on China and the