Australia’s Private Sector in Recession

Yesterday’s initial reaction from the online media gave it almost no mention.

Today’s Australian Financial Review (AFR) mentions it but sees it as a positive.

Typical.

You’ve read and heard all the nonsense about the strength of the Australian economy. Just yesterday the ABC reports Kevin1807 as saying:

“Today we have revealed and released the national accounts. They point to a strong performance for the Australian economy. Australia’s GDP has grown by a solid 0.5 per cent in the March quarter. We are proud of the fact the Australian economy has emerged as the only major economy which has not gone into recession. Only two economies of the 30-plus economies across the OECD [Organisation for Economic Cooperation and Development] did not to go into recession.”

Hats off. No recession for Australia. A “strong performance for the Australian economy.”

If only it was true. Only it isn’t is it?

Actually, that’s a rhetorical question. I’m telling you it isn’t true. But before I get into that, a quick diversion [Reader's voice: your diversions are never quick!]

Emperor Ken Henry claimed in a Senate hearing last week – you can read it here – that the resources sector didn’t save the Australian economy from oblivion. Well, if it didn’t what did?

(By the way, he said something else in his comments which I’ll mention another day).

Unfortunately, His Excellency doesn’t reveal the details of what did save it. Only that it wasn’t the resources sector. So there.

So we rummaged around to find some clues from previous comments made by the Emperor. As we rummaged we stumbled across the Money Morning we wrote on August 18th last year.

In that article we quoted the Emperor saying:

“My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities – of governance and flexibility – of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds.”

The gist of Emperor Henry’s argument is that it was governance (bureaucracy) and regulation that saved the Australian economy from a recession. In that article we argued that wasn’t the case.

Our belief then – and still – is that it was the Australian resources sector that saved the Australian economy. That Australia has a get-out-of-jail-free card thanks to China. But we will concede one thing. And that is the other thing that ‘saved’ the economy was all the taxpayer funded bailouts.

The bailouts to the banks, the property sector and the retail sector.

In fact, from what we can see, the resources sector is the only sector that didn’t need an Australian taxpayer funded bailout to stop it from collapsing. Whereas the banks, property sector and retailers did.

However, I’m not saying that the resources sector didn’t go into the doldrums, because they did. You only have to look at the share prices through 2008 and early 2009 to see that.

But look at what’s happened since then. They’ve recovered. Now, granted, that’s been helped by external stimulus programmes in China and elsewhere, but the cost to the Australian taxpayer of ‘saving’ the resources sector was virtually zero.

In contrast, the cost to the Australian taxpayer to save banking, property and retailing has been in the billions. And despite those billions all three are still on the precipice of a collapse.

That’s simply because the bailout billions have done nothing more than postpone the recession or depression. The taxpayer bailout didn’t really save anything, it has just ensured it will happen this year or next, rather than last year.

But as we looked at that article, we noticed something else we’d written. It was this:

“Henry’s claim that ‘governance’ is responsible for future Australian economic growth is a warning sign to prepare for the worst. Clearly it will embolden policy makers to become even more interventionist… The problem is the resources industry is perfect cover for meddling bureaucrats. The ‘guaranteed’ demand from China and the flow-on effect this has on the Australian economy enables bureaucrats to constantly raid the cupboards whether it’s through taxes or royalties. These taxes and royalties are then used on pet projects – roads, hospitals, schools, bribes, etc… This necessitates more spending to create bigger and better projects.”

See, we do get some things right! But look, you don’t need to be a fortune teller to have worked that out. It’s just plain old common sense. Take from the profitable and give to the unprofitable.

Anyway, let’s get back to where we started. The news is, Australia’s private sector is in recession. The proof is below. But how can that be true if as Kevin1807 says, Australia’s economy is strong?

We say “balderdash” and “bunkum” to Kevin1807s claim.

Take a look at the numbers from the Australian Bureau of Statistics (ABS) released yesterday:

You’ll see the number I’ve highlighted is the 0.7% contribution to the gross domestic product (GDP) by the public sector.

And if you look at the column to the left, you’ll see that’s a 39.5% increase in public sector fixed capital spending since March last year.

And for further evidence of how terrible things are for the private sector, the GDP numbers show non-dwelling construction is down 8% over the last year and machinery and equipment investment has only risen 0.2%.

In other words, the Australian private sector has actually contracted by 0.2% over the last quarter, and would have shrunk a whole lot more over the last year without the government spending away taxpayer dollars on wasteful projects such as buildings and housing insulation.

Of course the Keynesian economists and interventionists will say, “Aha! You see, this is exactly why the government had to step in. It had to save the economy because the private sector wasn’t up to the job.”

The truth is the opposite.

Let’s look at it this way. How has all the taxpayer dollars been spent? As I’ve mentioned it’s gone on school buildings, insulation schemes, make-work projects, and other pointless activities.

Now, you’ve seen the result of these things. Billions spent on housing insulation which no-one really needed. Billions spent on school gyms which no school really wanted.

How has it been financed? It’s been financed through debt and taxation. That means taxpayers have already paid for these projects or you will pay for them in future taxes.

How can it be logical to say that spending money on things you don’t need is a good idea? Again it’s the old issue of observing what isn’t seen.

And these GDP numbers show you what isn’t seen – if you get what I mean.

You can see the school buildings going up as you drive through any suburb in Australia. They’re real. You can see builders taking a smoko, er, I mean, building stuff. You can see the activity of people installing insulation, or repairs made to a road which seemed fine anyway.

But what about what you can’t see?

Stimulus spending money has to come from somewhere. It comes from either taxes or government borrowing. Either way, it comes from your pocket today or from your pocket in the near future.

That means less money for you. And it means less money for the private sector that also pays taxes.

So, while you can see the building and the working and the whatever-else it is the government is blowing money on, what you can’t see is what isn’t happening.

What you can’t see is the $100 you may have spent on a new shirt. $100 that you can’t spend because the government has decided to take it, combine it with $100 from ten million other taxpayers and spend it on a $1 billion do-something project.

But it’s not just you that’s punished by not being able to afford the new shirt. There’s the shirt seller who’s missed out on a potential $100 sale.

Or what about the $1,000 that you may have invested in shares? Well, you can’t do that either, because the government has kept that money by not cutting taxes, or will take the money by taking taxes in the future. The $1,000 you may have spent has been combined with the $1,000 of say another one million potential investors and has been spent on a $1 billion do-something-else project.

Not only have you missed the opportunity to invest $1,000 in something that may actually make money, but there’s also a small company – or a large company – that is unable to raise $1 billion to expand or start a business because instead the money has been blown on a few new school gyms.

In fact, that company may have only needed a quarter of that amount in order to provide ten times the benefit to the economy. But because the government has taken it and thrown it away, private enterprise misses out.

You see, the government spending money for the sake of spending money doesn’t actually help an economy. It harms the economy. In the long term it can actually destroy an economy.

You can see that clearly in the GDP numbers which show government spending going through the roof, while the private sector stagnates.

And also don’t forget that not only does the government spend your money but it overspends. I’m sure you’ve heard the stories of school buildings costing $1 million when an equivalent building in the private sector would cost $250,000.

That’s simply because of the lack of profit motive that we’ve written about before. Government agencies are given a budget and it’s their job to spend up to that budget. Contractors know that and will therefore quote top-dollar, plus add-ons which are approved after the contract is won.

And if they overspend, guess what, they tax or borrow more.

The problem for the Australian economy now is that with all the money and savings that have been wasted by the government, how can the private sector recover? Businesses have been unable to invest because they’ve been starved of capital.

Individuals have been encouraged to keep spending in order to save the economy, so they haven’t saved either.

In other words, the Australian economy will have to try and grow despite a higher tax and debt burden, and despite the consumer already being maxed out with over $1 trillion of household debt.

That means there are only two options left. Both of them bad. And perhaps you’ll suffer from both. That is, a continuation of government spending, or an increase in inflation.

Or both.

Both give the immediate impression of prosperity – new buildings, higher prices, higher asset values – while in reality the wealth of the nation is shrinking and suffocating under the burden of higher taxes, higher debt and of course, higher inflation.

Nothing good can come from government and bureaucratic meddling. The latest GDP numbers are to be mourned, not celebrated.

Cheers

Kris

Tagged as: private sector, recession