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.


Time to cut

The CPI data released this morning was a fantasatic number if the RBA wants to act on the two most important words in their vocabulary currently: “if needed”. Coming in at 0.6% quarter on quarter (qoq) the headline CPI was right on the money as was the year on year (yoy) out turn of 3.5%. But it was


Do we need foreign investment?

This post explores a simple question.  Why do we need foreign investment? The below quote from Mark Mansfield triggered this line of thought. We do not need foreign investment to develop Australia. We may need to buy technology and skilled labour from overseas, but we do not need foreign investment. Foreign investors cannot spend their


Alternative egg heads

Every month the Melbourne Institute puts out its economic forecasts for the year ahead. I like to follow these forecasts because the Institute is made up of very smart, egg-head economists in the mould of the Treasury and RBA, but without the constraints of politics or central bank protocol. Throughout this year they forecast lacklustre


One glowing local government

Citizens of Australia and New Zealand, take note of the below YouTube video the next time your local government increases your council rates or unnecessarily meddles in your daily life. Sandy Springs, Georgia is a northern suburb of Atlanta that is home to around 95,000 people. In 2005, Sandy Springs took the novel step of


Demonising mining

This morning the head of the Minerals Council of NSW, Nikki Williams, gave a feisty speech about the increasingly troubled relationship between mining firms and the community. The speech left me a bit short of oxygen to be honest and, in my view, will simply inflame tensions. Let’s take a look: We’re the darlings of


Terms of trade still taking a hit

The Australian’s China correspondent, Michael Sainsbury reckons you should worry about Europe, not China: To read some of the headlines this week about Australia’s biggest export, iron ore, one might have thought the sky was falling. One might have concluded the iron ore worm had suddenly turned, that by far our biggest market, China, had suddenly got


Terms of trade expectations

The ABS today released their International Trade Price Indexes for September.  These figures are not used to produce the official terms of trade measure, but they can be used to generate a very close alternative estimate. Today’s numbers show import prices flat over the Sept quarter, with export prices up 4%.  This is likely to


Mining jobs in context

The Pascometer offers an advertorial today for “Queensland Mining and Gas Jobs Expo” which: …rolls into Caloundra on the Sunshine Coast today with organisers expecting 2000 people to attend.  On Wednesday 10,000 people turned up for the expo’s Gold Coast gig. The patchwork economy is working. Those with longer memories will recall job applicants queueing


Will you pay for The Oz?

In a stroke of irony, The Australian released the following story online this afternoon: THE Australian has announced it will launch digital subscriptions on Monday, with a three-month free trial for all readers. Publisher News Limited said the national broadsheet’s strategy was built around a digital content pass which would provide access to The Australian online and


NAB survey confirms Dutch disease

The September quarter NAB Business Survey  is out and as you can see above. It shows an economy with slumping confidence and conditions, but stable pricing. NAB also makes a point of describing an economy suffering from an unprecedented division between weakness and strength: Business conditions slump and confidence falters mid-quarter, but monthly profile points to subsequent


The jobless vs dole numbers

The RBA and some commentators seem a little confused about the Australian labour market.  Why? Because the ABS labour force data is showing the unemployment rate rising, while the Department of Education, Employment and Workplace Relations (DEEWR) data on income support payments (such as Youth allowance and Newstart) shows a declining number of welfare recipients.


The NBN is money well spent

Yesterday, Telstra shareholders voted in support of the deal offered by the federal government and NBN Co. At a glance this deal appears to offer Telstra $11billion compensation for access to its infrastructure facilities, and for the decommissioning of the copper network. For me, the technicalities of this deal are almost immaterial in terms of


Will it be a black Christmas?

Dun & Bradstreet, the collections agency, has released a new consumer survey suggesting that the forthcoming Christmas will be a dour one. According to the survey: …which focuses on Australians’ expectations for savings, credit usage, spending and debt performance, also found that only 20 per cent planned to apply for new credit, down from a


The resources curse

Australia’s current terms of trade boom is a media darling.  This widely quoted statistic has provided a degree of comfort to those who proclaim the robustness of Australia’s economy due to close trade connections with Asia, and China in particular. Most readers would not be aware that macroeconomic researchers have built up a solid evidence


More on the car-house connection

I’ve dug into some more data to see what the car sales-housing connection might be able to tell us about future demand for credit and the results are striking. First is ex-refinancing monthly housing finance charted against car sales and, as you can see, there’s some kind of lead/lag correlation. The largest divergence over recent


Lending finance solid

ABS Lending Finance for August is out and shows growth across the board: AUGUST KEY FIGURES Jul 2011 Aug 2011 Jul 2011 to Aug 2011 $m $m % change TREND ESTIMATES Housing finance for owner occupation(a) 14 361 14 554 1.3 Personal finance 7 081 7 145 0.9 Commercial finance 32 298 32 948 2.0


Two speed states

I don’t use the rhetoric of the “two-speed economy” generally because it’s basically an Orwellian spin on something much older and well understood: Dutch disease. However, NAB’s monthly State by State report out this morning has a terrific breakdown of the the growth matrices in each state and makes fascinating reading. For instance, exports: And


More on unemployment

So, unemployment fell from 5.2862044% to 5.2477873%. Following are the charts. First, the larger picture. As you can see, for the past year job creation has been very patchy. If anything, it resembles the GFC period: Below is the split of part and full time jobs. There has been a lot of churning between the two


Unemployment down a tad

ABS Labour Force data is out and shows .1% fall in unemployment to 5.2% in September. No doubt this will excite the bullish pundits, who, having spent the better part of a month trashing the data, will suddenly fall in love with it again. The key points are below: SEPTEMBER KEY POINTS TREND ESTIMATES (MONTHLY


A black Swan

In a Ministerial Statement released this evening, Treasurer Wayne Swan gave up on the endless China boom rhetoric and launched a new rather bearish narrative. The release appears to have three aims. First, it’s fair bet we’re seeing the ground shifted for the news that next year’s surplus is evaporating as we speak. Second, the


The BCA rent seeks population growth

Economies evolve by bargaining over rents.  This occurs in the commercial sphere, where market power leads to price outcomes.  But where bargained outcomes are troublesome is in the political sphere – where vested interests ‘buy’ policy changes for their own benefit. No doubt, this second type of bargaining is part of the motivation of the


Consumer confidence bounce stalls

So, the bounce in consumer confidence has stalled, increasing by just 0.4% in October from 96.9 in September to 97.2. There is a interesting picture building around consumption at the moment. On the back of flattening expectations for rate hikes, we’ve seen a little pop in retail sales, pent up demand if you will. I’ve also


NAB survey indicates no rate cut

The NAB survey has put in a solid performance for September. Business confidence remained subdued but conditions and trading jumped. So too did the employment index. Forward orders was still in deep negative territory and exports are subdued. Given the backdrop of global volatility, I see this as a very good result. As does NAB: