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Has the Australian economy peaked?

May 31st, 2011 · Greg Atkinson · 16 Comments

Last year when I dared to suggest that the Australian economy was unbalanced and that 2011-2012 could be a period of economic contraction the mainstream financial reporters were churning out “miracle” economy stories. Back then they were obsessed with telling their readers how the mining boom would shower riches across the Great Southern Land, but today many of them have started to sound a lot more cautious.

The structural flaws within the Australian economy are becoming pretty obvious now even to desk bound media economists and slowly their bullish calls about the RBA raising rates sooner rather than later, are beginning to fade.

Even the housing market is showing clear signs of cooling which means about the only thing keeping the economy expanding is the resources sector and even there, much of the growth is expected to come from investment in new mines and facilities.

However much of the money flowing towards infrastructure in the resources sector effectively heads offshore since Australia manufactures relatively little mining related equipment. From the large trucks that carry iron ore to the massive floating offshore LNG facility that will used on the North West Shelf when it comes to equipment, the mining boom heads offshore.

Of course plenty of the money invested in the mining sector will flow into the Australian economy but let’s not bury our heads in the sand and pretend that much of it won’t flow out again. If a company such as Shell owns the rights to a gas deposit then Shell will aim to recover all the money it has invested in developing that gas field plus make a tidy profit. Those profits (after taxes) then belong to the shareholders in Shell, not the Australian government or people.

Of course we could have set up a sovereign wealth fund as I suggested back in 2009 and invested in resources projects (see: Is it time for another Australian sovereign wealth fund?) but Kevin Rudd and Co reckoned taxpayers would get better value by handing out cheques, blowing billions on the NBN and racking up debt on wasteful spending projects.

One day we might just look back and realise what a mess we made out of the global financial crisis and rue all the opportunities we missed to make the economy more resilient.

Consumer confidence levels clearly show that the people are concerned about the future and have cut back on spending. The interest rate hikes by the RBA last year and the rising cost of living are also starting to put a strain on many household budgets.

To makes matter worse we are starting to see some weakness in the housing sector and if the residential property market was to trend downwards for the rest of the year, then I am pretty sure consumer and business confidence will also trend downwards.

Meanwhile the strong Australian Dollar slowly turns the screws on what’s left of Australian manufacturing and isn’t doing traditional retailers much good either as people are increasingly shopping online.

On the bright side unemployment remains fairly low at around 5% and government debt by G-20 standards, is not a serious problem for now. But what is worrying to me is that even in the midst of elevated commodities prices Australia still has a very significant current account deficit. (CAD)

However a Treasury paper from 2010 entitled Australia’s current account deficit in a global imbalances context concludes that:

“…Australia’s large CADs in recent years, and the prospect that these could continue for some time, do not appear to be a cause for concern. Increased external borrowing is financing investment, mainly in the resources sector, that is likely to yield high rates of return and will expand export supply capacity. In these circumstances we could expect external borrowing to raise the wellbeing of Australians and to be readily serviced. Although net foreign liabilities are likely to grow significantly as a share of GDP, the size of the trade balance adjustment needed to ensure long-run sustainability appears readily achievable.”

So at this time I will comfort myself in the fact that the experts appear to think this is not something to worry about at this time.

What we know for sure is that the Australian economy is showing signs of some weakness and that the stock market has been reflecting this for many months.

The GDP numbers for Q1 that will be released tomorrow will show that the economy was dragged down by the damage cause by natural disasters in late 2010/early 2011. But we need to bear in mind that the economy was showing signs of weakness well before Q1 and that we may simply be at the start of an economic downturn.

The prevailing wisdom appears to be that the Q1 GDP numbers will just be a bump in the road and that the rest of 2011 will be much kinder to the Australian economy.

However it may well be that if we strip out the impact of the natural disaster that we see once again the underlying weakness inherent in the Australian economy.

This leads me to wonder if the Australian economy has reached a multi-decade peak? Perhaps rather than just a cyclical downturn the economy is facing something much worse, for example could we see years of stagflation or a multi-year recession? How would Australian’s deal with such situation after decades of almost non-stop growth?

Maybe it would be in everyone’s best interests if we moved on from talking about the booming economy and started to think about how we will handle a major economic downturn because maybe, just maybe, that downturn has already started.

16 responses so far ↓

  • 1 AU Stocks // May 31, 2011 at 8:23 pm

    Very interesting perspective. Hopefully tomorrow’s data won’t be as frightening as you suggest, but you’re right: we should exercise caution.

  • 2 Greg Atkinson // May 31, 2011 at 8:48 pm

    I don’t think the numbers will be frightening as such, actually I am more worried that any weakness will be explained away as related to the floods and cyclone. I wonder how long we can go on relying on the mining boom to save the day?

  • 3 Stock Market Today // Jun 4, 2011 at 4:46 am

    Interesting take on this issue. While I would have to disagree with some points, I think it is fairly obvious that the economy is slowly and will continue to do for some time. The housing sector needs to recover soon!



  • 4 Greg Atkinson // Jun 5, 2011 at 10:46 am

    I think Peter Switzer and I are on the same wavelength. Simply brushing aside the latest GDP numbers as being merely another bump in the road is akin to burying our heads in the sand.

    See: Meanwhile, back in the real world (Source: The Australian)

  • 5 Biker // Jun 6, 2011 at 3:55 pm

    Wellllll, I predicted the sharemarket would steadily ease up past 5000… and you said the opposite, Greg, so you’ve got that one right, so far. šŸ˜€

  • 6 Greg Atkinson // Jun 7, 2011 at 8:58 am

    I suspect the ASX All Ords will make a run for 5000 again this year but at the moment the combination of the month of June and the economic news from the U.S is dragging the market down towards 4600.

    Somebody must be worried because the mining boom will never end stories are doing the rounds again in the mainstream media šŸ™‚

    But the Baltic Dry Index is still at pre-boom levels so if world trade is booming then nobody has told the shipping companies.

  • 7 Leigh Wallis // Jun 7, 2011 at 10:58 am

    I saw an analysis that said the mining sector amounts to 8% of the Australian economy where the services sector is over 60%.
    If this is true then it puts the mining boom in a different perspective. From the talk, I was surprised the mining sector didn’t have a 99% stake.

  • 8 Greg Atkinson // Jun 7, 2011 at 11:26 am

    Leigh I think it depends on if analysts etc look at the direct impact mining has on the economy or the indirect impact. I will try and get a figure but the 8% would be the direct figure and I doubt it takes fully into account how mining revenue flows into other areas of the economy.

    The services sector would contract if the mining boom came to nasty end so I think it is incorrect for economists to pretend that the Australian economy would somehow tick along fine without the boost it’s receives from commodities.

    By the way, I think this article by Craig James (Commsec) is well worth reading: Perhaps mining saved us after all

  • 9 Ned S // Jul 28, 2011 at 2:40 pm

    Lots of meat in this article:

    PS: Not sure why the author felt to put in the last two paras of drivel from Swan and a lackey? But either way, “I’ll be very cross if anything should interfere with the ‘Golden Age’ Dr Henry promised me” muttered Wayne … šŸ˜€

  • 10 Greg Atkinson // Jul 29, 2011 at 9:55 am

    Ned I think people are slowly starting to appreciate that the boom years might be behind, us hence the reason people are saving more and spending less. Our economic grand plan has been: ride the mining boom, bring in immigrants and then sit back and enjoy the good times.

    As for Ken Henry..well he has arranged his own personal golden age by moving from the public service into a highly paid job advising Julia Gillard. Nice work if you can get it.

  • 11 Ned S // Jul 29, 2011 at 10:41 am

    Well they seem to have figured out what Plan B is anyway Greg – Let inflation rock ‘n roll and tax the hell out of everything.

  • 12 Ned S // Jul 29, 2011 at 11:55 am

    I thought the following was an excellent article Greg. Never heard of the IPA before? But it’s obvious a lot of commentors hate their guts! šŸ˜€ :

  • 13 Greg Atkinson // Jul 31, 2011 at 6:29 pm

    IPA..who is the IPA Ned?

  • 14 Ned S // Jul 31, 2011 at 8:23 pm

    Apparently the IPA is some sort of right wing ‘think tank’ Greg.

  • 15 Ned K // Sep 5, 2012 at 8:59 am

    A neoclassical think tank, who won’t release who their donors are.
    Sort of a think tank ‘cash for comments’ deal.

  • 16 Greg Atkinson // Sep 5, 2012 at 9:32 am

    Can’t say I’m a fan of “think tanks”. Sounds like a gathering of know-it-alls and lobbyists to me. Then again I would never be invited to join one anyway so maybe I just bear a grudge against them šŸ™‚

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