The Two Hands of the Aussie Economy
Is the Aussie economy travelling along nicely, or is it struggling?
It’s a tough question to answer. But putting my economist hat on, I would say ‘both’. On the one hand, we have solid commodity price growth and low unemployment levels across the economy. If you want a job, you should be able to get one, and that’s a good thing.
On the other, there’s not much wage growth to speak of. In addition, you have a stalling housing market, which threatens to turn into a stalling housing (and apartment) construction market.
This sector is an important cyclical employment generator, so if the cycle turns down, job growth may weaken and consign the Aussie economy to an ongoing low growth environment.
Before I go on, let’s just go back a bit first and remember how we got here.
That Major Financial Event…
It all goes back to that major financial event, the global credit crisis, in 2008/09. It unleashed a massive stimulus response around the world. China, in a panic about the impact of rising unemployment, went hard and created it’s own massive credit boom, which expanded most quickly from 2009 to around 2012.
The immense credit created flowed through to Australia. Along with fiscal and monetary stimulus from Aussie authorities, that helped us to avoid the recession that beset the rest of the world.
As the China credit boom inflated commodity princes into their peak in 2011/12, the Reserve Bank changed tack and increased interest rates.
From the ‘emergency lows’ of 3% reached in 2009, official interest rates increased to 4.75% by November 2010, and stayed that way for the next 12 months.
Then China began to slow sharply, which gave Australia a pay cut via lower commodity prices. Given the preceding commodity price and investment boom, Australia was looking at a potentially nasty slowdown as mining investment cratered.
In response, the RBA cut rates…and kept cutting…from November 2011, all the way through to August 2016. Rates fell from 4.75% to 1.5%, way below the 2009 ‘emergency level’ of 3%. Along with the government’s standard economic growth generator, high immigration, falling rates created another boom, this time in the housing market. And as prices boomed, so did construction.
That, of course, kept the economy afloat as the benefits of more people and new housing spread throughout the economy. Along with a rebound in commodity prices, this has resulted in strong employment growth over the last few years. But the boost provided by the housing boom may have run its course, and so far, it’s not led to a pick up in wages growth.
Two separate articles from The Australian yesterday take up the story of Australia’s potential looming problems. The first points out the precarious state of the east coast inner-city apartment market:
‘The inner-city apartment property crunch is now starting to really bite. In Sydney the number of cranes has fallen by one third and is set to fall by another third.
‘Dominant developer, Harry Triguboff’s Meriton, has stopped buying Sydney land, sending land values into free fall as bankers prepare for losses. Meriton is also curtailing its building activity.
‘In Melbourne building the crunch is being delayed because developers are proceeding with construction because they have old permits that allow greater density than the new rules. If they don’t proceed the opportunity will be lost.
‘And the building supply industry in Melbourne is booming because the state is undertaking unprecedented infrastructure investment.’
That doesn’t sound like an industry that needs or could cope with an increase in interest rates. And the reason we can’t deal with higher rates right now? Poor productivity. The other article notes:
‘Wage growth is lagging because the economy is stuck in a cycle of low inflation with poor productivity growth, not because the workforce has lost bargaining power, a new study has found.
‘The study says the economy is close to full employment with little idle capacity in the labour force, even taking account of people working fewer hours than they want.
‘The research, by the University of Nottingham’s Chew Lian Chua and Melbourne Institute economist Tim Robinson, says wage growth will pick up over the medium term, but not to the levels that the federal government is counting on to return the budget surplus.’
For the past 10 years, our growth has primarily come from short-term stimulus, not from longer term structural change that pays long-term productivity dividends.
When short-term stimulus runs out, more is needed. The effect of low interest rates on house prices has run its course. While population growth and a healthy global economy will be good for Australia for a while yet, it wont be enough to bring us back to the strong growth levels of years gone by.
We are in our own ‘new normal’. That is, low growth, interest rates to remain on hold for some time yet, and an economy continuing to rely too heavily on houses and commodities.
Tomorrow, I’ll look at how to invest in such an environment.
Editor, Crisis & Opportunity