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Where is the Australian Economy heading in 2012?

February 3rd, 2012 · Greg Atkinson · 19 Comments

It wasn’t that long ago when ex-Treasury Head Ken Henry talked about the Australian economy being in a ‘Golden Age’. I guess when you can retire on a lucrative public service pension and then parachute into a highly paid job as an advisor to the Prime Minister the future does probably seem bright. But now in early 2012 as unemployment appears set to rise and the economy is showing signs of weakness, Ken Henry’s ‘Golden Age’ comment might end up in the same category as Tim Flannery’s ‘Dams will no longer fill’ prediction.

My long held view that the Australian economy is unbalanced and primed for a recession has been set out on this site numerous times so today I am going to also focus on what some in the mainstream media are saying about the Australian economy and then outline briefly my outlook for 2012.

Firstly let’s look at trade and according to an article in Bloomberg yesterday things look pretty good on that front for Australia. The article states that:

“Australia’s trade surplus soared to a record in 2011 on coal and iron ore shipments, sending the local currency to a five-month high.

Exports outpaced imports by A$19.3 billion ($20.7 billion) in the 12 months through Dec. 31, a Bureau of Statistics report showed in Sydney today. The December surplus unexpectedly widened to A$1.71 billion from a revised A$1.34 billion in November, compared with the median estimate of a A$1.2 billion surplus in a Bloomberg News survey of 21 economists.

The data underscore the Reserve Bank of Australia’s expectation that Chinese demand for the nation’s commodities will help propel the domestic economy even as a global expansion slows.”

Source: Australia’s Record 2011 Trade Surplus Bolsters Currency: Economy

That news about exports does sound good but there are a few things that need to be said about the passage above. Firstly, energy exports are to Japan are up since most of its nuclear reactors are not in use pending stress tests after the Fukushima nuclear power plant incident. This would have given the export numbers a boost upwards.

Secondly the slow down in the Chinese construction sector, which is happening, will take time to affect iron ore & copper shipments but I will go out on a limb and say this slowdown will hit the numbers in the first half of 2012.

Lastly it worries me that the Reserve Bank of Australia (and in fact the Government as well) has no plan to deal with a major downturn in Australia because they believe that demand from China for our commodities will save the day. Interest rates are still too high!

The Baltic Dry Index (BDI) has fallen off a cliff since December 2011 and is back at a level where it was during the darkest days of the global financial crisis. This suggests to me that global trade levels are on the way down and this will impact the demand for commodities like iron ore, copper and coking coal.

A less optimistic view regarding the Australian economy was set out recently by Philip Bowring in the Wall Street Journal. In his article Australia’s Economic Luck May Not Last he writes:

“The producers’ assumption is that additional demand from China will continue to keep prices buoyant. But China’s growth is slowing and anyway will move gradually from materials-intensive infrastructure to consumption and services. India and other developing countries should see steady growth, but that will probably no more than offset stagnation in developed-world demand for materials.

All this should be worrying for Australia, where the consensus believes that any softening in mineral prices will be offset by increases in Australian supply. But commodity prices always move much more violently than changes in demand. How would Australia’s trade look if gold were back at $800, coal and iron ore at $60? The gain that Australia has enjoyed in its terms of trade, which has underwritten so much else, would quickly vanish.”

Those two articles sum up the two main views regarding the Australian economy. The first one is that the Chinese economy will basically continue to drag the Australian economy along for the ride upwards whereas the second view is that the commodities boom will come to an end, and that the impact of this on the Australian economy will be severe.

Back in April 2010 I wrote the following:

“If you are an investor and you have not contemplated an economic slump in Australia during the next few years then in my view, you might be in for a nasty surprise. Yes the Australian economy did hold up well during the worst of global financial crisis, but the crisis isn’t over yet and it still has some sting left in it’s tail”.

Source: What might an Australian economic slump look like?

Around the time I wrote the above paragraph the G-20 crowd were patting themselves on the back for saving the global economy. Their cunning plan had been to borrow a heap of money and spend their way out of trouble and the few people (like me) who thought this was quite a stupid plan were in the minority who were simply ignorant of the magical properties of Keynesian Economics.

In Australia rather than trying to strengthen sectors outside of mining our government’s ‘brilliant’ plan involved such measures as handing out cash so people could by cheap imported goods, the construction of school halls and the infamous home insulation program. This spend-a-thon quickly wasted the billions saved by the previous government and now Australia, in the midst of a mining boom, is in debt.

So where is the Australian economy heading in my view? My answer remains the same as it did in 2010…for a fall. However unlike 2010 many of the mainstream media business and finance commentators also appear to share this view now and even the Gillard Government seems aware that it needs to do something.

Too bad Gillard spent a fortune on her education revolution over the last few years which basically achieved nothing. The money would have been better spent on a manufacturing revolution.

The reality is now that it’s probably too late to do much to protect the Australian economy from a slowdown in China unless that slowdown isn’t for another 5 years. If the prices for commodities continues to fall this year then a recession in Australia is almost a certainty.

It is true that events in Europe haven’t helped, but all booms come to an end and the failure of policy makers to plan for this is a national disgrace.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


19 responses so far ↓

  • 1 GoWest // Feb 3, 2012 at 4:55 pm

    Fundamentally the Oz economy is still strong. Unfortunately Fairwork has ensured jobs growth in areas other than mining and government will be negative. The non-hiring of casuals from the retail sector over christmas was a good example of what to expect.
    Seems the currency increase is now due to strong mining exports? Supply and demand is ignored? QE is ignored! What is the RBA doing – burning Oz dollars instead of printing them?
    Julia’s green coalition has borrowed billions in an effort to create an Australian green economy. She would have been far better spending the money on flood mitigation and fire breaks as the market carbon price indicates the green economy is doomed. (get those climate scientists filling sandbags!)
    She still mouths the same old “we are managing the economy to produce more jobs and growth” (for union retrenchment packages that is), whilst the budget goes backwards faster than a scared rabbit.
    The only thing she has going for her is that business is getting hopeful that it will all be over in 2013.
    Therefore I still stick to my prediction of a market continuing to go sideways.
    As for another GFC – Japan has the highest debt repayments in the world, so they could be hoping for an excuse to write-off the repayments. Mind you lots of other countries are trying to catch up with them in the debt stakes.

  • 2 Lachlan // Feb 3, 2012 at 9:00 pm

    Taxing and spending on an increasing scale is a disaster even in a resource rich country. Too much government, too little private investment.

  • 3 Stillgotshoeson // Feb 3, 2012 at 9:25 pm

    Where is the Australian Economy heading in 2012?

    Down the toilet, just deciding if it is going to be a half flush or a full flush…..

    QE will give a boost but the end result is going to be the same.

    Keynesian theory is “general” in nature and is to work along with private sector.
    One could reasonably argue that Keynesian theory was not implemented in the US.
    The steps that the Australian government took where more Keynesian and one could also argue that it worked far better than what has been done in the Northern Hemisphere.

    Had things worked out differently in the North then we could well have got through the GFC relatively unscathed.

    Property correction would still occur (much later) as a more booming economy would have meant higher mortgage rates, higher rates that would have been to big a burden for those overcommited. Housing market was struggling already with interest rates on mortgages around 9.5% just prior to the GFC.

    I can see no signals in any data set for the ASX to break the 5000 level. 4500, 4750 and 5000 levels all reach strong resistance and there is just not enough fundamental reasons we can sustain breaks above these levels with the current volatility in the markets/economy. Government intervention can bolster markets for short periods but nothing sustainable. My view has not changed, ASX will test the GFC lows before this is over, may not be this year. QEIII from the USA is not far away. My cash position is still high, some skin in the game but waiting for better buy conditions into the future.

  • 4 Greg Atkinson // Feb 4, 2012 at 7:30 am

    GoWest when I look at what Australian exports & imports I have a hard time agreeing with you that the Australian economy is strong. We simply don’t do much value adding and this means we are getting along basically thanks to high commodities prices, a lot if inward investment and government spending.

    Once the mining tax revenues drop off the government isn’t going to have the money to prop up other sectors of the economy and already we are seeing job losses in manufacturing & banking. Perhaps the demand for commodities will not fall much further and prices level ou,t but even so I have difficulty is seeing how jobs are going to be created over the next few years. What sector of the economy will do this? Mining along?

  • 5 Stillgotshoeson // Feb 4, 2012 at 9:41 am

    It is interesting to note that in the US some companies are re opening shut down manufactoring facilities and closing some of the offshore ones, however at these reopened facilities the wages are much, uch lower than were originally paid.

    People are willing to take these jobs.

    Maybe Australia will face a structural change into the future as well.

  • 6 Greg Atkinson // Feb 6, 2012 at 8:53 am

    Moving jobs offshore still seems to be the trend in Australia and it isn’t just low skilled jobs either. For example aircraft maintenance work has been outsourced overseas as have back-office administration support work for banks & telco’s etc.

    So it’s no longer a case where simply low paid, low skilled jobs head to places like China. Now it’s more a case of if it can be done overseas and the costs are lower, then that’s where the work will head.

    In a decades time I wonder if Australia will be able to export any significant volume of manufactured products at all?

  • 7 Lachlan // Feb 6, 2012 at 9:12 am

    exactly

  • 8 Trading Coach // Feb 6, 2012 at 2:16 pm

    If you say it will fall or it won’t, you are right. Things will be better if we look at it in a brighter perspective.

  • 9 Biker // Feb 10, 2012 at 6:23 pm

    The Australian economy in 2012? I didn’t miss today’s childish taunt over at PerthNow, Shoes. Maybe you didn’t see my response:

    “StillgotShoeson (1st Nov 2010):’Next year it falls over. Our dollar will be savaged. The big four are on a hiding to nothing’; and (28 Dec 2010): ‘…technical recession is a distinct possibility late 2011 early 2012.’ Shoes… you’re blushing… you want links?!” 😉

    C’mon… Call me a _moron_ again. 😀

  • 10 Leigh // Feb 12, 2012 at 11:07 am

    Greg, I think the fundamental problem with keeping jobs in Australia, particularly in the manufacturing sector, is that it costs too much to hire people. High wages, holiday leave loading, workers compensation insurance, long service leave, superannuation, sick leave, maternity leave , paternity leave, just in case leave and probably the worst of all payroll tax.

    Secondly we are not very good at it; the things we make don’t sell that well elsewhere and Australians have little commitment to buy Australian. Perhaps we need to look closely at Sweden. How do they have a great export sector in cars, trucks, buses, and earthmoving equipment with 9.4 million people and a place that is under snow for half of the year? We buy chainsaws and Lawn mowers and sewing machines from Sweden because you can’t get a decent one here. How do they do it? Sure their tax rate is high and they subsidize their farmers but it works.

  • 11 Stillgotshoeson // Feb 12, 2012 at 1:46 pm

    Stillgotshoeson Posted at 7:59 PM February 10, 2012

    Travs… Unemployment…. Rising, property prices falling and banks raising rates outside of RBA moves, these are all things I said we would be in for. The decline in the Australian economy is continuing. Whilst timing has been out, the trend has been correct. Where you have had to adjust your story a number of times.

    Comment 77 of 78

    “Biker // Feb 10, 2012 at 6:23 pm

    C’mon… Call me a _moron_ again. :D”

    No need… You continually prove it…

    Just add impatient as well though.

    Further dialogue on this topic is not required…….. 😉

  • 12 Greg Atkinson // Feb 13, 2012 at 8:44 am

    Leigh I think the high cost base is only part of the reason. As you mention the other is we just don’t seem to have a focus on manufacturing high quality products.

    I once worked for a Swedish company and travelled there often some years ago. The Swedes design and manufacture an amazing range of products as you point out including telecommunications equipment much of which is used in Australia.

    Could we turn around the fortunes of our manufacturing sector? I think we could but, it would require some long term vision & very flexible labour laws. I don’t see either of those becoming possible with the current government so jobs will keep heading overseas for the next few years at least.

  • 13 Leigh // Feb 13, 2012 at 4:40 pm

    Greg, I don’t see a change of Australian government doing much to change the manufacturing sector’s fortunes either.
    When I was in Sweden I was in a bus involved in a major highway pile up. Within a minute or so police were there directing traffic around the scene to keep it flowing and to avoid further pile ups. Within an hour, forty odd vehicles had been cleared, several people had been taken to hospital and we had a new bus and were on our way. In Australia they close the freeway for hours while they investigate, creating traffic chaos.

    Maybe there is something in that efficiency difference that tells us why we don’t see Holden’s in Stockholm but lots of Volvos in Sydney.

  • 14 Greg Atkinson // Feb 14, 2012 at 11:27 am

    You might be right Leigh. For whatever reason we don’t appear to have that certain something which pushes us to value add and pump out world beating products. In fact we don’t even have that many widely recognised global corporate brands such as Volvo. I can think of only five or six globally recognised Australian companies: Qantas, Cochlear (?) BHP (Anglo-Australian) Macquarie Group, Rio Tinto (Anglo-Australian) and Westfield Group.

  • 15 Ned S // Mar 11, 2012 at 2:04 pm

    The All Ords is still about 35% below its peak 4 and a half years ago. And ours is the economy that is “the envy of the world”. There’s a lot of this stuff that doesn’t make much sense to me.

  • 16 Plornt // Mar 12, 2012 at 5:06 pm

    “The All Ords is still about 35% below its peak 4 and a half years ago. And ours is the economy that is “the envy of the world”. There’s a lot of this stuff that doesn’t make much sense to me.”

    Well that just reinforces the value of the XAO relative to the DJIA. DJIA is ~10% off its pre-gfc highs; vs XAO @ 35% below with obvious price/earnings differences. Interest rates would have some effect, but I think there is a China softening already discounted into the market. A lot of smart people are taking advantage of the Euro/Greece situation by savvily investing in Greek equities. I am not investing in Greece because I donot understand Greek equities nor get financial info for it, but for those who can it’s a great idea.

    That said even with the DJIA perhaps underperforming other indexs from here, a lot of quality large caps like WMT; MSFT etc should do well regardless, and after any possible correction (may not happen) will continue to rise in the long term. I am surprised the re-rating on quality American largecaps has not occured meaningfully yet. Seems to be stuck in a never ending range, but i’m optimistic the patient will do well (something I need to improve upon). My intrinsic value on forward 2016 earnings for MSFT is $45 and WMT is $80. My main reason for prefering XAO to DJIA is because I can find many companies with a bigger discount to intrinsic value in Australian markets.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 17 Greg Atkinson // Mar 12, 2012 at 7:55 pm

    Ned you read my mind. I actually touched upon what you were saying today in my latest rant 🙂

    I think we can safely say our economy will go where ever China will drag it. We don’t seem to have too many other strings to our bow these days.

    I think we are starting to see the last of the nasty shocks out of Europe. The EU nations will struggle for years but that reality is not pretty widely accepted.

    But the possible shocks to come out of China are a bit of an unknown at the moment. I am sure there are some waiting for us to stumble into.

  • 18 Steve // May 28, 2012 at 3:47 am

    I am currently in the uk on business half the time you don’t know how to take all the economic hype at street level things don’t seem as bad as in the news if you realy want a job you can get one but I phone my mates in oz and they tell me central coast nsw most of Qld it is hard to find a survival job and all the hype about mining they want qualified and exp workers. I think this china hype is fake as there are a lot of reliable articles from big business experts who say the GDP figures ect are all cooked, as most of the data is commie propaganda and there is no way of checking it’s credibility. Some 80 year old ex stock broker said on tv in the uk his firm always went on how many ships were going through the suez and panama canals. Recession on the way

  • 19 Greg Atkinson // May 28, 2012 at 11:34 am

    Steve the number of ships heading through the Suez Canal sounds like a very good economic indicator to me. Other similar ones are the number of ships laid up or being scrapped. Both are currently at high levels.

    The Chinese GDP figures are certainly tweaked to say the least. I have seen quite a bit of analysis this year questioning if there is in fact any growth in China this year. Remember to keep growing they have to keep building what they did last year in China and then some again this year. That’s a lot of construction.

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