This has been written to attempt a brief articulation of a major concern that far from saving Australia from the ‘global financial crisis’ the actions, rhetoric and policies of the current Australian government are going to totally immerse us in it, or delay our recovery from it, or both. We are just 1% of the global economy. Time is needed to see where the stimulus packages of China, America and Europe will lead the world. Current local policy prescriptions seem to be pre-emptive, excessive, and poorly targeted.
Ecinya essay of 8/2/2009 reproduced as an Ecinya Insights article on 1/9/2009 – "A reflection: Australia and the global financial crisis".
RAZOR GANG ORDERS MORE BUDGET CUTS: Disaster recovery costs soar/ pressure on growth forecasts – federal cabinet’s powerful expenditure review committee has told ministers to find a new round of budget savings from their departments as it scrambles to fund a natural disaster bill that threatens to reach $8billion. It is expected that budget growth growth forecasts will be revised down for 2010-11 from 3.25 per cent to 2.5 per cent as a result of the disasters here and in Japan.
Front page The Australian Financial Review April Fool’s Day 1/4/2011.
The papers are saying that the Prime Minister cannot ignore facts. This is nonsense. If he cannot ignore facts he has no business being in politics
From Sir Humphrey Appleby KCBs 1989 diary. British TV series ‘Yes Prime Minister’
We have moved beyond the days of big government and big welfare to opportunity through education and inclusion through participation. We have always acknowledged that access to opportunity comes with obligations to seize that opportunity – to work hard, to set your alarm clocks early, to ensure your children are at school. We are the party of work, not welfare. That’s why we respect the efforts of the brickie and look with a jaundiced eye on the lifestyle of the socialite.
Prime Minister Julia Gillard at the inaugural Gough Whitlam oration in Sydney 31/3/2011.
COMMENT ON OUR HEAD QUOTES
1. Prime Ministers who would rather be Presidents love a global financial, or any other, crisis as it makes them appear to be Presidential. But the GFC would have had little impact on Australia once bank borrowings were guaranteed and some simple measures including a payroll tax holiday implemented. The excessive response depleted the coffers, and waste and fraud resulted.
2. The inevitable outcome of the GFC response has been revealed today. We can now expect a cacophony of statements saying it is all due to the floods, the earthquakes, etc. But being ‘tough’ today means I might be able to give you some tax cuts when I next ask you to vote for me. Austerity is good for all of us and is a demonstration of our economic maturity though we were the ones who squandered the surplus.
3. Our current Prime Minister routinely ignores facts such as the Building the Education Revolution fiasco; talking about brickies, but not insulation installers; threatening to punish inefficient states where government has just changed from Labor to Liberal and knowing that the new governments are blameless; the absence of an adequate feasibility study on the NBN; facts surrounding global warming and Australia’s relative position in the global warming quantities.
4. It is rather ironic that a speech given in the name of our worst fiscal PM in post war history (Mr Gough Whitlam) should deliver lines so vacuous as to be laughable.
PURPOSE OF THIS WEEK’S INSIGHT ARTICLE
The purpose of this week’s article is to put some perspective on recent economic opinions and data.
Though we consider the primary drivers of stock-market activity to be interest rates, confidence and company earnings (‘ICE’) the health of the economy is an important context. However, as we have pointed out before economic forecasts can be misleading and deceptive and must always be approached with caution. Economists have a very bad track-record in calling turning points in both the economy and stock-markets. Winston Churchill, talking about desirable qualifications in a politician (which can be applied to many economists as well) said: "The ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn’t happen."
Another purpose is to discipline ourselves to get ‘up to speed’ on the economic stats and the accompanying rhetoric ourselves.
REAL GDP FOR AUSTRALIA. (gross domestic product – the value of all goods and services produced in the economy)
- The Economist Outlook book of December 2010 forecast GDP growth of 2.6% for calendar 2011.
- The March 2011 Economist magazine revised this up for 2011 to 3.1% and gave a 2012 forecast of 3.7% and revised inflation up to 3.1% for 2011.
- The AFR of 1 April 2011 schedules the views of 23 bank and institutional economists as having a median forecast of 2.9% for 2011 with a high of 4.2% residing with Barclays Capital and a low of 1.7% from ANZ Bank. Median headline inflation is 3.1%
- The same AFR issue has a median GDP forecast of 3.9% for 2012 with a high of 4.6% and a low of 3.1%. ANZ is at 4.2%, Barclays 4.3%.
- From International Monetary Fund stats of October 2010, Australian GDP averaged 3.8% in the 10 years to 2001, and 2.8% in the 10 years to 2010. If we exclude 2008 and 2009 when GDP averaged 1.7%, the other 8 years averaged 3.1%.
Observations: Apart from the ANZ in 2011 the consensus is fairly firmly in the camp of on-trend growth for 2011 around 3.0%. Our guess is that calendar 2011 will be a sluggish year with an overall growth rate around 2.0%. This is closer to the ANZ view than the consensus.
THE RESERVE BANK CREDIT STATS TO FEBRUARY 2011
We all know that money and credit makes the world go round and that when confidence is high and growth is readily apparent that people and businesses borrow and spend more.
Stats for the year to February 2011 and corresponding years back to 2008 from the RBA credit statistics indicate –
- Owner occupied housing rose 6.8% in the year to February 2011. This compares with the 2010 year of 9.9%, 2009 8.3% and 2008 11.9%
- Investment housing rose 7.5% for 2011, 5.3% for 2010, 4.2% for 2009, 10.8% 2008.
- Other personal credit 0.7% for 2011, 1.3% 2010, negative 6% 2009, and 11.4% 2008.
- Business credit for 2011 negative 1.7%, 2010 negative 7.1%, 6.3% for 2009, and 21.9% 2008.
Observations: All of the credit Numbers were in double-digit territory in 2008 with business being particularly strong at almost 22%. personal credit has slowed dramatically. Owner-occupied housing has slowed significantly. Business credit has slowed dramatically. Overall these statistics indicate that the economy is sluggish. Anecdotal evidence in the retail sector confirms the personal credit stats.
WESTPAC BANK ECONOMIC BRIEFING NOTES FOR MARCH 2011
These flash notes from Westpac are very sound and probably excellent. We are only attempting a quick precis of their contents and conclusions. They may not be available to non-Westpac customers, but all of the banks produce regular economic updates. The main thing we are looking for when reading any of the economic notes that we access on a regular basis is a change in the rhetoric ….. the nuance…..we have found over the years that economists are slow to react and downgrade, or even upgrade, their opinions. Generally, we find that the stock-market itself is head of the economists. Also when a cogent argument is not reflected in the market you can wait until the market catches up, or chooses to ignore it.
2 March 2011 Bulletin: The Australian economy… a mixed end to 2010… Q4 GDP 0.4%, 2.7% for the year. Apart from inventories the contributing inputs were muted…..domestic demand growth low, housing in negative territory, business investment lacklustre. Westpac is expecting just one interest rate rise in 2011, out of step with the consensus view which is expecting more. Ecinya is closer to the Westpac position, though there is the possibility that the Australian and the world economy might weaken such that the RBA drops interest rates.
3 March 2011 Bulletin: Australia’s trade surplus holds at $2bn despite Queensland floods. Volatile fuel imports slumped $754m which helped coal and iron ore export weakness.
3 March 2011 Bulletin: Australian dwelling approvals slump as flood hit combines with reversals in apartments spike… year on year approvals negative 24.8%
9 March 2011 Bulletin: Consumer sentiment dips despite steady rates…. the Westpac-Melbourne Index of Consumer Sentiment fell by 2.4% in March falling from 106.6 to 104.1.
9 March 2011 Bulletin: January finance falls 4.5%. Housing finance dropped significantly in January, with the approvals process disrupted by the floods that devastated Queensland and parts of NSW and Victoria.
10 March 2011 Bulletin: Jobs growth negative 10k… job creation stalled over the last 3 months. The Australian economy entered a soft patch as 2010 ended and this has extended into 2011. ….The annual pace of growth in total hours worked slowed to 2.3% from a peak of 4.3% in August 2010.
16 March 2011 Bulletin: Leading index falls….. The annualised growth rate of the Westpac-Melbourne Institute leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 3.5% in January 2011, slightly above its long term trend of 3.3%, but down on the 4.6% pace recorded in December and the very strong 9%+ growth recorded early last year. The growth rate of the Coincident Index was 2.0%, well below its long term trend of 3.3%.
17 March 2011 Bulletin: Westpac-ACCI survey of industrial trends… conditions jump, reversing ground lost in 2010… there is now a clear majority of respondents who expect that the general business situation will improve…. Manufacturer’s plans for investment spending on plant and equipment for the next 12 months strengthened markedly…. profit expectations are solid, reflecting rising sales expectations, despite concerns about rising costs and limited pricing power.
31 March 2011 Bulletin: Australian retail sales… another solid gain but conditions flat ex Queensland.
31 March 2011 Bulletin: Australian dwelling approvals… slide deepens.. year on year negative 21.8%…… even allowing for weather related impacts the data does suggest a weaker trajectory for approvals into 2011.
OVERALL CONCLUSIONS: The Westpac analysis is mixed and tending towards caution but overall activity seems reasonable. As most of the data relates to February and prior, it will be interesting to see whether, or not, the April data deteriorates in context of the likely budget outlook and the carbon tax ‘debate’. Ecinya expects a volatile year for economic statistics generally and major hesitancy on the part of consumers. We do expect a drop in interest rates sometime after the May budget. The oil price is a worry against the background of the Libyan and broader Middle East geo-political and military happenings.
THE INTERNATIONAL MONETARY FUND 25 JANUARY UPDATE
Growth remains subdued in the advanced economies with unemployment still high and renewed stresses in the euro area contributing to downside risks. In many emerging economies growth remains elevated but inflationary pressures are building. Downside risks to overall recovery remain elevated and policies to redress fiscal imbalances and financial systems require rapid and comprehensive action.