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The Australian economy, the Twilight Zone and known unknowns

June 20th, 2011 · Greg Atkinson · 14 Comments

On a daily basis, dozens of finance and business journalists try to convince the general public that they somehow have an insight into what the Australian economy is doing or how the economy will fare over the next six months or so. But the truth is, nobody has a clue what will happen for the rest of this year as we are still stuck in the Economic Twilight Zone.

Let’s start with the Australian economy, which most economists now agree is struggling outside the mining sector. I am not an economist and I’m also not a recent convert to struggling Australian economy school of thought. As regular visitors to this site will know, I have been writing about the inherent weaknesses in the Australian economy for some time and have discussed how the stock market has been telling us for more than a year, that the economy is struggling.

At the moment those weakness are starting to become apparent. The housing market is starting to lose some steam and this is adversely impacting consumer confidence. This in turn makes the business sector less confident while companies also need to deal with such things as a strong Australian dollar and a chaotic political landscape.

The current situation was summed up quite nicely I believe in a recent Commsec market bulletin in which economist Savanth Sebastian wrote:

“Aussie consumers remain super cautious. The Westpac/
Melbourne Institute index of consumer confidence hit a two-year low of 101.1, falling by 2.6 per cent in June after a 1.3 per cent fall in May. The latest fall in consumer confidence highlights the cautious attitude displayed by Aussie consumers.

Most people still harbour doubts that the global financial crisis is
truly over. Then add in the natural disasters – not just in Australia but around the globe – the tensions in the Middle East, fears about a carbon tax, and sliding equity markets and it is clear that consumer sentiment is facing a lot of headwinds. No doubt the added uncertainty about further interest rate hikes is also taking its toll on confidence.”

Earlier in the year many economy and market commentators were saying further interest rate hikes by the Reserve Bank (RBA) would be coming along “sooner rather than later” (to paraphrase Jessica Irvine from the SMH), but we are now almost half-way through the year and the RBA is sitting on their hands – which I believe by the way, is the wise thing to be doing.

In fact I would suggest that if the RBA were to raise rates during the next few months then someone better check what they are drinking at their board meetings. This is not the time to be putting further pressure on the housing sector, consumers and businesses.

It’s pretty clear now the growth of the Chinese economy is slowing, mind you it’s still zipping along at a rate that leaves most of the world in it’s wake. At the moment however, nobody seems to be worrying too much about this slowdown, although I sense the news regarding the Chinese economy is going to get worse during the remainder of 2011 and this will really spook the RBA.

My view of the Australian economy is that we are still stuck in what I called the Economic Twilight Zone in July 2009. Back then I wrote:

“The “zone” is confusing place for we cannot be sure if the economic data we see if a trend or an abnormally. The economic picture has been distorted by the interventionist actions by government around the world and nobody is quite sure what this means for the long term world economic outlook.

We are no longer in bear market territory and yet we are not really confident we are in the next bull market either. Australian economic data suggests we are not yet in a technical recession however unemployment is rising, business investment is down and government tax revenues are falling. It feels like a recession but is it? Or do we simply feel we are not in a recession when we actually are?”

Fast forward to today and it looks to me that not much has changed. The stock market has effectively gone nowhere, employment growth is stalling and you won’t see too many company CEO’s or business owners dancing on tables.

The uncomfortable truth is that we are hoping the US economy will sort itself out while keeping debt under control (yes, you can laugh now) and that China will somehow manage a command economy better than has ever been done before.

As for Europe, it seems everyone has such low expectations for most economies there (except Germany) that it’s almost forgotten except when a debt crisis comes to the fore. The days of racking up debt to keep the people happy are over.

The Australian economy for it’s part, is being dragged along for the ride and you get the sense that the Government, RBA and Treasury are hoping more than anyone else that their almost blind faith in the mining boom will pay off.

That’s because as I have said many times, there is no Plan B. It’s China or bust.

So to sum up the current economic situation in Australia and in fact globally, let me use a quote from Donald Rumsfeld, the former U.S. Secretary of Defense.

“There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.”

Or as we might say in Australia – it’s as clear as mud!

14 responses so far ↓

  • 1 Biker // Jun 20, 2011 at 2:05 pm

    A thoughtful, well-written snapshot.

    Your comment: “The housing market is starting to lose some steam…” is appropriate. We attended an auction during the weekend. Fabulous home in an almost perfect location… and we may have been the only genuine attendees. It was cancelled half-an-hour after the advertised start time.

    The agent was happy to tell me the reserve. It was well below replacement.

    But, in addition to the various marketS we know exist, it’s now becoming apparent there’s a ‘dual economy’ in housing developing: BUYING vs RENTING. I’ve little knowledge of eastern rental values or returns, but rents are rising very quickly here. A year or so ago, I spoke of silly demands made by landlords. Those rents are now commonplace. So commonplace that, for the first time, we’re actually querying the wisdom of not raising rents at the conclusion of any lease.

    With interest rates on hold… population rising… and residential construction slowing so dramatically, we think WA’s usual 8.7% annual rent increase is a thing of the past. It’s not at all unlikely we’ll see rents rise $100+ in 2012.

    At that point, in WA anyway, we believe homes in the $350K – $450K range will disappear quickly. Already, we can’t build for the prices we’ve seen some bargains recently. It’s the stamp duties on existing homes that’s the killer… .
    These don’t apply to FHBs, of course.

    But for your comment “…the housing market is starting to lose some steam…” this response to a new thread might seem misplaced. Your perceptions on the larger picture do seem fairly accurate, Greg.

  • 2 Brian L // Jun 20, 2011 at 2:44 pm

    G’day Greg.

    As an interested reader of your blog for years I appreciate the clarity and unbiased nature of your comments.
    You have proved to be mostly correct over the years and wish I had linked my investment decisions more closely to your observations, understanding of course that your comments do not constitute advice.


  • 3 Greg Atkinson // Jun 20, 2011 at 7:33 pm

    Thanks Brian. I do try and make sense out of all the confusing information out there although it is best to keep in mind that I did not expect the GFC to be as severe as it has been.

    Having said that, I have tried to redeem myself over the last few years πŸ™‚

  • 4 Lachlan // Jun 21, 2011 at 4:45 pm

    No dramas Greg, you got the global warming thing correct though . I’m as crook as a dog (flu) with all the cold weather around the place. Looking at the global temps timeline unfortunately warmth is way over-bought. The AGWers bought at the top and copped a sell-off. Hoping for a bounce though πŸ˜‰

  • 5 Greg Atkinson // Jun 21, 2011 at 5:57 pm

    Biker I think a few years pause in the housing market would actually be a good thing. Let’s see how long the RBA can hold their nerve and sit on rates hey?

  • 6 Ned S // Jun 25, 2011 at 10:14 pm

    Off topic, but I’d hate anyone to miss out on this:

    It’s just such a jolly good laugh! πŸ˜€

  • 7 Greg Atkinson // Jun 26, 2011 at 10:16 am

    Well Ned with unemployment at 9% in the US I guess someone has to be optimistic I guess. My feeling is that the US is almost at the halfway point in their own ‘Lost Decade’ and if they manage to keep the damage contained to just 10 years they will be doing well.

  • 8 Biker // Jun 26, 2011 at 7:11 pm

    “Let’s see how long the RBA can hold their nerve and sit on rates hey?”

    I think the banks themselves will continue to reduce rates for low-risk clients, Greg. Our son proved this recently, getting the ANZ to knock 0.3% of his already low rate. Retention panels and retention teams are fighting to retain customers.

    Enjoyed that article, Ned. I had to laugh, too. πŸ˜€

    Worth watching ‘An Inside Job’ again, to remind us how US banks screwed the pooch. It’s claimed little has changed.

  • 9 Biker Pete // Jun 26, 2011 at 7:17 pm

    And further to that theme, you’ll recall I claimed a few weeks ago, that Colin Barnett wasn’t losing any sleep over lost revenues.

    Seems his treasurer _may_ be just a little concerned:

    “Treasurer Christian Porter, also at the event, said the government had already lost $430 million per year in stamp duty due to reduced sales and there was no room to move…”

  • 10 Biker // Jun 27, 2011 at 7:34 am

    And, to persist with this ‘falling rates’ theme:

    (But ANZ customers can negotiate 6.8% as our son proved… .)

  • 11 Ned S // Jun 27, 2011 at 10:39 am

    Our American friends have got serious problems. Apparently their debt situation is better than the Greeek’s – But not by much.

    China; Well, as we’ve commented before, having a few trillion in reserves just could give you a fair bit more wriggle room when it comes to stimulus than some others – So China is on the right side of that Kenysian experiment at least. Plus it wouldn’t surprise me if the Chinese take a different approach to dealing with any problems in their banks to what the rest of the world has to date – Which may well be a better approach. Though it may not be one that we even especially hear about – Providing it IS successful. (Guess it kind of helps if gov can dictate to banks that they shall lend and where exactly the loot will be lent as well?) As to the cooling in their building, it’s something they wanted. With the question being Are they getting more cooling than they wanted?

    Oz; Yep, if things should turn down there’ll be lower interest rates and more stimulus for the building industry presumably.

    I see ANZ is offering 6.25% on deposits Biker. Think I’ll drop in on my local branch for a chat.

  • 12 Ned S // Jun 27, 2011 at 11:04 am

    Hmmm …

  • 13 Biker // Jun 27, 2011 at 12:16 pm

    Ned: “I see ANZ is offering 6.25% on deposits Biker.”

    Better than we’re currently getting on call, Ned: 6%.

    Might go chat to them, Tamara! πŸ˜‰

    Have to settle a few bits & pieces before we fly… .

  • 14 Ned S // Jun 27, 2011 at 2:42 pm

    Yep, CBA has me on 5.75% on call at the moment Biker. Given I’ve been busy with 30 June stuff I didn’t get around to visiting them personally last week when that happened. It was the best I could score with a phone call to customer service. But fronting up personally with a withdrawal slip in one’s hand typically helps to soften bankers hearts’ a bit in my experience.

    UBank and Rabo are both about 6.5% but I like the convenience of dealing with a local branch. Plus (while it’s probably false logic in this case) I never feel totally comfortable just chasing the highest rate.

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