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Exports down, imports up and an economy sliding backwards.

December 9th, 2009 · Greg Atkinson · 9 Comments

Some time ago I wrote that we would better served by having a Hobbit look after the Australian economy than the RBA, Treasury & Government and recent events have made this idea look particularly attractive. For at present we have the RBA raising rates, the Government spending and the Treasury appears to be unsure what is happening.

Frankly it looks to me like the Australian economy is adrift with nobody able to articulate what the Government is trying to do except spend. However trying to spend until the economy is out of trouble is not exactly the most imaginative economic policy decision and back in June this year I outlined my concern that Rudd’s spending frenzy was not going to keep the Australian economy ticking over nicely for very long.

On the 22nd June for example I wrote:

“…what will happen if Rudd’s billions fail to make up for the lost income from mining exports for example? Could the Australian economy slide backwards once the initial boost from the economic stimulus measures wear off? Yes it could, and at this stage this is what I expect to happen.”

At the time few people writing about the Australian economy would have agreed with me, but now it is quite clear from Australia’s widening trade deficit that I was correct. Not only have coal and iron ore exports fallen (again as I predicted months ago against the prevailing wisdom) but exports are now actually a drag on GDP, not a boost.

Quite simply the economy is drifting backwards.

I have lost count of how many times I have rambled on about the danger presented to the economy by counting on commodities resources to pull the nation through every economic crisis. Make no mistake about it, if commodities prices continue to remain under pressure and demand eases then the Australian economy will head into a recession. In fact I would even suggest the economy has been in or on the brink of a recession for some quarters.

I know the “official” data says the economy is supposedly doing well but the stock market, unemployment numbers and trade data suggests otherwise. Next I expect to see house prices soften, consumer confidence take a hit and business investment slump.

But Glenn Stevens apparently believes all is well. According to an article in the Sydney Morning Herald today he is quoted as saying: ”At the beginning of the year I would not have expected the economy to be looking as good as it does”.

Okay, so let me get this right. Rudd & Co. have splashed out $40 billion or so and the Glenn is surprised this has helped the economy? I am not sure if I should be scared or send him a note reminding him that we as a nation have borrowed most of that 40 billion.

So perhaps you think I am out of touch? Maybe, but it seems some people over at the Treasury aren’t quite as happy with Australia’s economic situation as the RBA.

Kim Christian for example in another article from the Sydney Morning Herald (December 8, 2009) reported that:

The Australian economy will remain sluggish for at least the next 18 months despite forecasts of above trend growth, a senior Treasury bureaucrat says.

Treasury director of the Domestic Macroeconomic Group Dr David Gruen says the fewer number of hours being worked by Australians could be masking a higher unemployment rate after employers cut hours rather than jobs during the financial crisis.

Dr Gruen said even if the economy experienced above trend growth next year, it would take time to bridge the gap between GDP growth and trend growth of three per cent.

“The unemployment signal is underestimating the amount of slack in the economy, simply because employers have been able to cut hours rather than jobs,” he said after delivering a speech to the Australian Business Economists (ABE) conference in Sydney.

“So, it seems to me, even with these optimistic forecasts of aggregate growth, we’re still looking at some amount of slack in the economy for 18 months or so.”

It looks to me as if the RBA and Treasury are not singing from the same hymn sheet as they say. The RBA appears to be patting itself on the back for raising rates because they say the economy is rebounding strongly whereas the Treasury appears to be taking a much more cautious few.

The fact that our export earnings are falling but we are importing more is not a good sign. In my blog GDP growth does not equal a quality Australian economy I stressed how dangerous it is for the nation to focus on GDP growth alone and Australia now finds itself in a situation where I would suggest that our GDP do not reflect (or convey) the unhealthy state of our economy.

We as a nation, have artificially propped up the economy by borrowing and spending while at the same time we are earning less. This is the same as a person ramping up spending on their credit card despite the fact they are earning less. It sounds a little risky doesn’t it?

What the Government is relying on is that the global economy will recover, our mining (and farming exports) will ramp up and we will be able to pay down our debt without too much trouble. Well that is the theory anyway.

As we have seen recently from the “Dubai shock”, seemingly unstoppable economic miracles can come unstuck. A national economy can only be pushed along for so long by building things even if they are artificial islands shaped like countries. Eventually the good times slow down and suddenly the world’s most lavish hotel or tallest building don’t look like such great ideas any more.

If you think the fallout from Dubai has been a little unnerving then just think what will happen if we get news about the Chinese economy slowing. I am not sure of course when that will happen, but it will one day, unless you believe that China is somehow different to every other “economic miracle” we have seen over the last 50 years.

When I was back in Australia recently I was surprised and even shocked how unaware most people were about the state of the global economy. It seems that many people equate China with the world, and are blissfully ignorant that the global economy has simply recovered from a massive slump and is not in the process of surging back to the heady days of 2007/2008.

The worst of the global financial crisis for many G20 nations appears to be over, but they are still far from being healthy economies. The danger for Australia is the worst is yet to come. So before popping the champagne corks I would wait about 6 months, as we just might find the nation’s economic optimism is about to have a reality check.

9 responses so far ↓

  • 1 Niko // Dec 10, 2009 at 9:50 am

    Great post.

    What miffs me is that if the US is China’s largest importer and is going through dire straights, then where are out commodity exports going after China reprocesses them?

    Also if the Chinese and Indians are on a world buying spree (even buying Aussie homes) doesn’t that show they’re scared witless and trying to protect their savings from a coming Armageddon.

    Anecdotally, a drill mining engineer friend (basically drilling for new mines) tells me the shit has hit the fan big time in the industry.

  • 2 Greg Atkinson // Dec 10, 2009 at 2:43 pm

    Thanks Niko. I think this article by Paul Colgan over at The Punch is also worth reading: The one Christmas present Kevin Rudd doesn’t need

  • 3 Ralph // Dec 11, 2009 at 2:49 pm

    Nice summary, Greg. That is exactly as I see things, too. The government seems to be a good job dressing things up, but to those who scratch beneath the surface, there is plenty to be concerned about.

    I still think that we’ll see some interesting events unfold as the stimulus continues to wind down. It all still looks very fragile for me, with a lot hanging on confidence. But it won’t take much of an external shock for that confidence to fall to the floor again.

    And as you’ve said many times, Australia has wasted the opportunity to do a bit of economic reform and diversification. We’re just lucky that our core industries – real estate and resources – are largely untouched. The government has bailed out the banks (and hence kept house prices bubbling along) and China has kept buying our rocks. As you say, what happens when China slows down? And I’m sure the government is hoping like mad that people don’t suddenly start thinking that houses are too expensive and stop buying. No plan B that I can see.

    I also wonder about the bank guarrantee. I can imagine that being extended indefinitely. Why not just nationalise the banks? I mean at the moment, the government is on the hook for all of their borrowing but doesn’t seem to have any real influence over them. Banks are dependent on the government’s guarrantee yet squeal loudly at the first mention of having to tighten liquidity or raise capital ratios. The banks ask for support and the government says “sure and feel free to do whatever you like because there’s much more where that came from”. The government seems almost afraid to say anything beyond mildly critical of the banks, yet the government is holding the whip hand. That’s not much of a relationship, is it?

  • 4 Greg Atkinson // Dec 11, 2009 at 3:49 pm

    Hi Ralph. You raised a point that I missed…the bank guarantees. I wonder how the Government will unwind those without causing some level of despair? This is why it is not such a good idea to rush in emergency measures etc. because at some point you have to wean the economy off them.

    At some stage I guess the Government has to say the finanical crisis is over and the bank guarantee needs to go, but the big banks won’t like that will they? I am guessing the banks have already given the Government the hint that if the guarantee goes then interest rates will be raised above what the RBA does, and so I don’t reckon anything will happen before the election.

    What do you think?

  • 5 Ralph // Dec 14, 2009 at 9:12 am

    Hi Greg,

    Yes, it’s hard to see the bank guarrantees being unwound anytime soon. The government and banks like to say that our banks didn’t have to be bailed out. But the guarrantees of bank borrowing are just a bailout by another name. I believe the guarrantees are in place until late 2011. With stuff like Dubai and Greece lately, there’s probably all sort of skeletons waiting to jump out of the closet that could bring back the wobbles. So I reckon they’ll rationalise some way to keep the bank guarrantee going for a little while longer. And even if by some surprise the guarrantee is removed, it’ll be there implicitly forever. Monumental moral hazard.

    Overall though, it’s very difficult to guage what’s coming up. We’ve got the government stimulating and guarranteeing like crazy to blow the rain clouds away and put the sun back in their place. But it’s done such a great job that the RBA is now raising rates.

    I reckon the RBA can only call things as they see it based on the official figures. That’s why I think we’re getting rate rises when we know that it’s still brittle underneath. I mean, they probably know that stimulus and first home buyers grants are all that’s keeping the economy going right now and that it could all blow over in the breeze if it changes direction. But if they didn’t raise rates with runaway official figures, it would make the official numbers look like a fraud. Official figures like CPI and GDP probably are fudged but if the RBA worked with their own intel and ignored the official figures, then we’d soon figure out that it’s all a farce and confidence would take a hit. Can’t have that.

  • 6 Greg Atkinson // Dec 15, 2009 at 10:03 am

    Ralph I think this sort of data should worry us. As reported in “The Australian” today:

    “The total value of commodity exports in the year ending June 30, 2010 is now forecast at $162.56 billion, up 2.7 per cent from a September estimate but down 18 per cent on actual exports of a revised record of $197.44bn last fiscal year, the Australian Bureau of Agricultural & Resource Economics, or Abare, said in its quarterly commodities outlook publication”

    As you probably know I was ranting on about how our exports earnings would fall as the AUD went up almost a year ago, but back then and even recently commentators like Michael Pascoe (0ver at the SMH) reckoned we were in the midst of another commodities boom!

    So even with massive amounts of economic stimulus being used to stimulate economies in the U.S, China, Japan, Germany etc. our commodities exports have fallen 18%…and there will be worse to come. The full impact in the cut in contracts prices is yet to flow though!

    For my money, a drop of this amount in exports earnings spells recession.

    As for the banks, the relationship between Big 4 and the Government is comical. The Government provides them a deposit guarantee which helps them crush the little guys and chalk up big profits and then Swanny comes in complains when banks do what they are designed to do, make money for their shareholders.

    If the Government wanted to create more competition in the banking sector they should not have propped up the big guys! Honestly, does Swanny, Rudd and Co. actually know anything about free and fair open markets?

  • 7 Ralph // Dec 18, 2009 at 1:09 pm

    Don’t get me started on Swanny!

  • 8 Dave L // Dec 22, 2009 at 8:22 pm

    I am not sure either why we seem happy to import more than export. To make matters worse we are selling off many of our exporting assets so the nation stans to benefit even less in the years ahead from any future commodities boom.

  • 9 Senator13 // Dec 23, 2009 at 4:16 pm

    Chevron, Royal Dutch Shell and Exxon Mobil are laughing all the way to the bank.

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