Over the last few weeks most of the financial media have once again managed to draw the wrong conclusions on a range of issues from Australian dollar to the strength of the Australian economy. Talk of the so called two speed economy seems to be back in vogue whereas I believe we should be focused on and worried by, the unbalanced nature of the Australian economy.
The Australian stock market is not soaring and most Australian small businesses are not enjoying a golden age of growth and high profits. According to a recent media release from the Australian Bureau of Statistics (ABS), the number of actively trading businesses in 2008/2009 actually fell by 1%.
Now this may not seem like much to worry about, but if the economy is truly booming then why have the number of businesses across the nation fallen? Shouldn’t continued population growth be creating more businesses?
Some “experts” tell us that the rise of the Australian dollar versus the U.S dollar is due to the strength of the Australian economy, but what they fail to mention is it more of a case of the USD falling, rather than the AUD rising. The Japanese Yen (JPY) and Canadian dollar (CAD) for example have also both strengthened significantly against the USD this year.
Without doubt commodities exports have kept money flowing into the economy and have resulted in Australia’s Terms of Trade bouncing back much more strongly than I expected. But I am not entirely sure this is a good thing since it only reinforces the “resources” mentality in Australia.
Australia has enjoyed a decade or more of solid economic growth but the downside to this is that many people don’ t expect that growth to ever end. People continue to take out bigger home loans to buy bigger houses, the Government seems intent on spending more and wasting more of taxpayers money and the view of many economists, market watches and financial journalists is that the good times will be around for years to come.
But how good are the good times actually? We might all feel richer and spend more freely than a generation ago, but are we really better off? Well if you look at the Household savings ratio the answer is no.
Australian Household Savings Ratio
(Source: Australian Bureau of Statistics)
As can be clearly seen from the graph above, the household savings ratio in Australia has been in long term decline. Simply put, households are saving less but spending more.
Over the last few years the level of household savings has increased, but this could be just a short term aberration as a result of the global financial crisis rather than the long term trend reversing.
I am not suggesting that the household savings ratio is an accurate way to track the growth or decline of net wealth or that it takes into account all household assets. Like all economic indicators it has plenty of limitations.
In addition the Australian Bureau of Statistics makes this comment about the ratio:
“The Household saving ratio does not take into account capital gains and losses as these are not considered to be part of Household disposable income. Thus a period of high asset price inflation (e.g rising house prices) will not directly influence the Household saving ratio. When considering the “wealth effect” it is possible that consumption in current quarters will rise on the basis of strong gains in the value of assets and in this situation saving will fall, all else being equal.”
Source: Australian Bureau of Statistics – Household savings ratio
Since house prices are not directly factored into the savings ratio many people will say that the measure is not accurate because it leaves out what in most cases, is the largest single household asset.
But since the cash generated from the sale of property would be included into house savings, property assets are indirectly included on a long term basis into the ratio. In other word, if you sold your home and made a tidy profit then your household savings would increase.
What the ratio does suggest to me is that there is an enormous amount of stored wealth locked up in housing which is why banks call it equity and are happy to let you spend it. (which in turn will probably extend the duration of your loan and helps the banks rake in more profit)
You could view the household savings ratio in two ways. On one hand you could simply dismiss it as an inaccurate measure because it doesn’t take into account periods of rising house prices or on the other hand, you could wonder why household savings have been in long term decline.
For me it is just another indication of how the Australian economy has become dangerously unbalanced. The nation’s economic future appears to depend on rising house prices and commodities exports with the latter very dependent on how the Chinese economy fares.
The optimistic view is that there is little to worry about apart from inflation and how to keep growth under control. The pessimistic view is that the foundations of the Australian economy are lined up like dominoes and if the Chinese domino was the topple over, the rest would follow in quick succession.
I believe the economy is stuck in the middle of the optimistic and pessimistic views somewhere. I feel both views have merit and as such I have a foot in both camps, or more precisely, I don’t know which outcome is the most likely so I am hedging my bets.
What I do know is that the Australian economy is becoming more unbalanced as the mining sector become stronger and home prices keep rising. Compared to a generation ago consumers spend more, save less and households are willing to take on bigger mortgages so they can buy bigger homes.
The nation is selling off commodities at a record rate and at record prices, unemployment is low, immigration high and if we believe the Government and the RBA we have never had it so good.
Perhaps the right decisions will be made by policy makers and global events will unfold in Australia’s favour, in that case the Australian economy may gradually become re-balanced or simply thrive as it is – maybe a balanced economy is for whimps?
Are we enjoying a period of unparalleled wealth creation in Australia that will continue for a decade or more, or are the wrong decisions being made by policy makers that will have dire consequences later?
I do not pretend to have the answer to this question, nor am I suggesting that I am drawing the right conclusions from the economic indicators I look at. My aim is simply to make people think and flag some of the risks out there for investors.
Maybe I have become too pessimistic over the last few months, or maybe I am onto something? I will let readers be the judge so please jump in and tell me what you think.