Good news! I’ll try to keep today’s article a little shorter than usual. I’ve been under the weather for the past few days and am struggling.
But still, the reckoning goes on, even if most people can’t see the need for it…
I’m talking about Wednesday’s GDP numbers that surprised on the upside. Real GDP growth came in at 0.6% for the December quarter and 3% for the year. That’s above trend growth.
And clowns like me have been warning about a recession!
But haaang on a minute. Just wait…
Before you turn your back on the wailing Cassandra’s, let me just turn you over to Paul Krugman who, in 2002, wrote:
‘To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.’
Now, Krugman is no slouch. He probably wrote that tongue in cheek. But Alan Greenspan certainly didn’t see the humour in it. He got the housing bubble going alright…
And six years later things got a little out of hand.
What’s this got to do with Australia?
Well, this is exactly what Glenn Stevens attempted to start in 2011. That is, create a housing boom to replace the mining boom.
What can we say? The policy has been a resounding success!
In the year to 31 December, the Aussie economy went nowhere near recession. Not officially anyway.
You see, the ‘real GDP’ number you see quoted everywhere measures the amount of production in the economy. So the mining sector, although going through a very tough time, still actually contributed strongly to ‘real GDP’ because of increased production in commodities like iron ore, coal and natural gas.
In terms of the industry contribution to growth, the mining sector grew 5.6% over the same period.
But when you take the prices received for the increased production into account, things don’t look so good.
‘Real net national disposable income’ does take prices received into account. It’s a better way of measuring actual economic wellbeing. As the Australian Bureau of Statistics notes, ‘a broader measure of change in national economic wellbeing is real net national disposable income’.
On this measure, Australia’s GDP fell by 0.1% in the December quarter; dropping by 1.1% over the year. In other words, the headline GDP figure increased by 3%, while the more effective measure fell by 1.1%.
That’s some disparity!
Of course, GDP is an aggregate number. Some areas are doing better than others. In the December quarter, Glenn Stevens’ housing bubble really came into force. Rising house prices, and the increased debt that comes with it, provided a big boost to household spending. The household sector was the strongest contributor to growth.
On an industry sector level, the financial sector also made a big contribution, as did construction; the rental, real estate and hiring services sector played its part too.
Along with hefty assistance, on the back of the increase in mining production, the strength from these debt and housing related industries made for a great headline GDP, which will do wonders for ‘confidence’ and the bullish case for the economy.
But the story is the same as it was in the US back in the mid-2000s. Debt fuelled growth (and the services that feed off this increase in debt) do very well for a short period of time (as in, a few years).
But then what? If you think building an economic structure around a constant increase in debt (while the income we earn to service the debt continues to fall) is a viable economic strategy, then…I don’t know…maybe apply for a job at the RBA.
The bottom line is that it isn’t viable over the long term. Anyone with common sense can see that. But we live in a short term world where the focus is always on the next quarter, or the next year. Not only that, but vested interests have such influence in this country that the chances of genuine reform are virtually impossible.
Take the just released BIS Shrapnel report that ramped up the scare campaign on negative gearing. The report, used by Treasurer Scott Morrison to slam Labor’s proposed changes to negative gearing, is already a laughing stock.
BIS Shrapnel won’t say who commissioned the report, but it did reveal it wasn’t a political or property lobby group that was responsible. It was a ‘private client’.
BIS has ‘private clients’ all across the property industry. They even have testimonials for two property clients on their website, including this one from Lend Lease, one of the largest land bankers and property developers in the country:
‘The residential research fundamentals and insights provided by BIS Shrapnel have always been very thorough and robust. Lend Lease subscribes to numerous BIS Shrapnel subscriptions and has also commissioned tailored research. The insights from these documents has been of great benefit for reporting, forward planning and monitoring performance.’
I bet it has. And no doubt some commissioned research has done wonders to help influence policy, too.
In the US housing bubble, the banks ‘owned’ the ratings agencies. The agencies gave the banks whatever credit rating they wanted.
It’s no different here. In a bubble, anyone can be bought, including economic forecasting firms.
All this furore around negative gearing tells you that it’s very good policy for a small part of society. And they are fighting tooth and nail to keep it.
The problem is that it’s not good for the majority of Australians. While ‘the majority’ are meant to vote governments in or out, that all depends on how effective scare campaigns are.
And as far as I can tell, this one isn’t going so well for the government.
Editor, Crisis & Opportunity
Ed Note: The above article was originally published in Markets and Money.
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