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.


Build it bigger

Here’s some good news. Today’s ABS Construction Work Done report for the June quarter showed decent activity in regular building work – housing and commercial realty – and stratospheric activity in engineering construction, which is all those major projects in mining:   The boom is most obvious in the private sector but public sector is


Parko puts ’em to sleep

Honestly, boring! After yesterday’s Battelino nothing speech, I’ve now managed to wade through Treasury Secretary Martin Parkinson’s effort last night at The Shann Memorial Lecture. Titled “Sustainable Wellbeing – an Economic Future for Australia” the thing is truly soporific, worthy of some Platonic form of bureaucratic perfection. The speech began poorly, citing a series of


Bailout nation

Last night MB hosted a stonking bare-knuckle debate following my Can manufacturing seize its opening? post. One of my main reasons for writing the post was to expose the political economy in which we find ourselves. By that I mean what is currently accepted as reasonable behaviour in the relationship between government, business, the media and


Can manufacturing seize its opening?

Suddenly there’s a little momentum behind the notion that to save manufacturing, Australia needs to manage its boom better. From the SMH today: The wave of job cuts in the steel industry, blamed on the high dollar, has reignited calls for a sovereign wealth fund to rein in the exchange rate. After BlueScope Steel yesterday


The AIG wakes up

It seems that the Australian Industry Group has finally gotten my message and has sloughed its genteel suasion of policy in favour of a full-throated roar for protection. The campaign is a macroeconomic gamble and may do nothing to alleviate members suffering. But, at least the manufacturing “crisis” I have been calling for has arrived


10 steps to manufacturing annihilation

Poor, poor manufacturing. It’s on the ten steps to doom: 1. Resources boom drives up the dollar and crushes competitiveness. 2. Canberra consensus embraces manufacturing’s destruction in the name of “adjustment” towards greater resources output. 3. Australian Industry Group (AIG) adopts a genteel approach to defending its members from annihilation. 4. Ken Henry proposes byzantine resource


How the mining boom is shared (or not)

One of the more interesting, persistent, rancorous and important debates that transpires here at MB, is the degree to which the mining boom is shared with the broader economy. I actually set out to answer this question a couple of days ago and was some way into a post when I discovered a new piece of


The stress in household credit

Yesterday, in a post about some long term housing data, I added an M3 chart that got a bit of attention. For those who don’t know, M3 is a broad measure of money in the Australian economy including all types of deposits in the lending institutions. As “loans create deposits” M3 is a good proxy


Do we have Dutch disease?

Well, obviously. But exactly what form it takes is open to question and fresh from the farm, Paul Bloxham of HSBC, takes the question on in a comprehensive new report. According to Bloxham, we aren’t ill at all (just as we have no housing bubble). However, we do face the following challenges: First, through banking


Weekly wages rise in May quarter

  ABS average weekly earnings is out and shows wage pressures in the pipeline in the first half of the year. As you can see from the chart above wages appear to be bouncing off the bottom. The RBA would not like this. In the below table, green is at or below the national average


Houses and recessions

Tracey Watts from the Third Wave Group yesterday alerted me to a research paper by Gavin Putland from the Land Values Research Group that examines the relationship between recessions and property prices in 41 countries worldwide. It offers the following key findings: A downturn in the property market, especially in turnover (sales) of properties, is a


Wage growth slashed

The Melbourne Institute is out with its quarterly Wages Report and chalk it up as another data point showing that the labour market has shifted from strength to weakness: Total pay growth over the 12 months to August 2011 slowed sharply, to 2.9 per cent from 5.1 per cent in the 12 months to May. Wage


The shocks that matter

Last night, the US blog, Calculated Risk, had an interesting argument about whether or not “event” shocks have a different effect on consumer psychology than do more enduring economic shocks. He produced the following table to make the point that the recent debt-ceiling debacle was an event-driven blow to confidence that is likely to be


Unemployment and house prices (revisited)

Back in May I published an article, Unemployment and house prices, that sought to determine whether changes in employment levels in Australia are likely to lag/lead changes in house prices. The purpose of this article was to test the commonly held view that Australian home values won’t fall significantly until unemployment rises, since people that


A lonely voice on manufacturing

Money talks and so there’s nothing like a billionaire or, at least, CEO of a multi-billion dollar firm lending support to your ideas. On that note I can only applaud the lonely voice of Andre Liveris at the Australian American Leadership Dialogue: One of Australia’s most senior expatriate executives has been lobbying political and business


Stimulus dreaming

Today the media is full of an ignominious campaign for monetary easing. There’s no need to point it out. It’s all over, with housing and share market spruikers everywhere cajoling, insisting, begging and positioning for rate cuts. It’s increasingly likely that they’ll be delivered but not yet in my view and not at all if


The employment picture

So, the employment market has turned. Kudos to the rather volatile but this time correct Roy Morgan measure. As you can see from the above seasonally adjusted chart, the unemployment rate rose in all states except WA (down .2%). The big jumps were in VIC (up .5%), SA (up .4%) and QLD (up .2%). NSW


Leigh Harkness on the RBA CAD perspective

Last week I discovered a recent speech by Guy Debelle on the RBA’s position on Australia’s current account deficit (CAD). I thought I would seek a response from Leigh Harkness as he has posted a number interesting articles about CADs over the last few months, and I have also noticed a number of discussion threads


Paths of recession

As I wrote this morning, I’m of the view that global equity markets have begun to price a forthcoming Western recession. Since then markets have rallied hard on the hope of QE3 tomorrow, which would change the game, but I thought anyway that I would trace the possible lines of weakness in the global economy and


Fog of the aged

Have you ever wondered why MacroBusiness exists? Why it is necessary for a dozen thirty and (just) forty-somethings to get together and write their buns off about the Australian economy? The first and most vital clue in answering the question is the ages of the MB team. At MB we are seasoned enough to have


PC report spanks online retail

In its monster retail report, the Productivity Commission has recommended (among a great many things) that the government lower the tax free threshold on online purchases of foreign goods. Thankfully, however, it has also amply demonstrated the practical foolishness of the idea with an assessment of the costs involved in monitoring the parcels at the


Is unemployment about to jump?

Yesterday, Roy Morgan Research released their latest poll on unemployment and and it caused a minor stir amongst market watchers: In July 2011 Australia’s total unemployment as measured by Roy Morgan was 885,000 (7.6%), up 40,000 (0.6%) from June 2011, and up 148,000 (up 1.3%) since July 2010. The Roy Morgan July 2011 ‘underemployed’* estimate was virtually


Charting the RBA

The RBA has released its monthly Chart Pack and like last month’s release, I’m going to have a look at this impressive data set for MacroBusiness readers. A warning, its chart heavy (obviously). The Chart Pack is divided into 16 categories, including international data, but this month I want to concentrate on domestic data, but


Coal powers on in June

Today’s trade figures from the ABS provide some positivity after what has been a run of unequivocally weak local data of late. While the trade balance narrowed from a revised $2.7bln in May to $2.05bln in June the composition of the numbers was more positive. Imports rose 2.6% over the month courtesy of a 7.3%


In-credible retail falls

ABS June retail sales are out and it’s more of the same with the seasonally adjusted estimate falling 0.1%. This follows a fall of 0.6% in May 2011 and a rise of 1.0% in April 2011. On to the charts. The first shows that the result was a big miss versus market expectations, God only knows


Services sector still in recession, or is it?

The AIG PSI Index for July is out this morning and makes interesting reading with the services sector still in recession, but without the same collapse seen in Monday’s manufacturing gauge: ■  The services sector contracted in July, with the latest seasonally  adjusted Australian Industry Group/Commonwealth Bank  Australian Performance of Services Index (Australian PSI®) rising 


Building approvals by state

Following are a series of charts drawn from today’s ABS Building Approvals numbers. First up, is the national chart for dwelling approvals, which doesn’t look too bad, though is obviously in a significant declining trend, giving back after last year’s stimulus dragged forward demand: When we break down by state, however, we get a very


No hike

Statement by Glenn Stevens, Governor: Monetary Policy Decision At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent. The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity


A modest proposal for manufacturing

If there’s one thing that bugs me about the Australian economy and business it is rent-seeking. It is that practice of big businesses wielding political power for shareholder and personal gain. It is a doubly toxic pursuit because it not only means that Australians often have to pay extortionate prices for goods but it retards


How many job losses will satisfy the RBA?

There is a technical economic concept that you should get to know, if you don’t already know it. It’s called the Phillips Curve. And it may be about to change your life. Basically, it posits an inverse relationship between rates of unemployment and rates of inflation. That is, the lower the former, the higher the