by Alan Thornhill
New – and dangerous – imbalances are appearing in the Australian economy.
Different parts are moving at different speeds.
And the need for pragmatism, to preserve stability, has never been higher.
Basic institutions, such as banks and health funds, are under threat.
And cheap populism, in the face of these threats, can cause damage that would not be easily undone.
Australia simply can’t sustain the string of big trade deficits, that was confirmed in figures released this week. These – untamed – deficits are now approaching $3 billion a month.
Yet one State – Western Australia – actually recorded a huge trade surplus – in January.
The WA Chamber of Commerce and Industry, notes the fact, with some pride.
It says:”The value of merchandise exports from Western Australia increased by 6.7 per cent to $5.7 billion in January 2008.
“This gave Western Australia a 43 per cent share of national export earnings in January.
“The State’s export earning are up by 20.8 per cent over the year to January.
“The value of merchandise imports into Western Australia surged in January, increasing by 37.4 per cent to $2.6 billion,” the chamber adds.
Much of that would have been mining equipment.
But the real story, in the State’s figures, is in it’s exports.
The net balance is truly amazing.
“Western Australia’s trade surplus with the rest of the world stood at $3.1 billion in January 2008, which is $342 million more than the same time a year earlier.”
What does all this mean, to those who are paid to give advice?
One thing, certainly. The old wisdom – go West young man – is just as valid in Australia today as it was in the United States in the 19th Century.
But running a two speed economy is much harder than managing one which is growing smoothly.
New South Wales, Victoria, South Australia and Tasmania are not exactly rust bucket States. But they are certainly not doing as well as Western Australia or Queensland, either.
The drought has helped to produce these distortions. It took Australia’s once great agricultural industries right out of the equation, over the past year.
There could well be brighter times ahead.
The Australian Bureau of Agricultural and Resource Economics is predicting a big bounce in the coming season.Â That is, if there is a return to average growing conditions. But, with recent dire weather patterns in mind, there must be some doubt about that. Especially as Australia’s food bowl, the Murrumbidgee Irrigation Area,Â is still in very bad condition.
Meanwhile, it will be critically important to preserve the strengths of Australia’s basic institutions, especially the banks. The banks, certainly, are hard to love, even at the best of times. But we must remember that, in the globalised economy we now have, they do raise big slices of the money they lend, in Australia, from overseas sources.
And the sub-prime crisis, in the US economy, means that for some little time, at least, that money will be more expensive than it once was.
Yes, the banks could be forced to absorb that. Popular pressure, alone, might be enough to achieve that. But they would be weakened, in the process.
Private health funds are also being squeezed, by ever rising medical costs.
This is definitely time for Australians to be realistic – and to absorb some pain.
The alternatives don’t bear thinking about. But they must be faced.
If major institutions, like banks, were to collapse, Australia would once again be tipped, not into recession, but into a 1930s style depression.
by Alan Thornhill
What has been happening in Australia’s bond market?
That question is particularly timely, in view of the wild rides now apparent in other areas, such as shares.
So Guy Debelle’s speech, on recent developments in the bond market, could not have come at a better time.
The full speech, available at www.rba.gov.au, makes good reading.
Mr Debelle is an expert. Indeed, he is the Reserve Bank’s Assistant Governor (Financial Markets).
He acknowledges that those involved in credit markets have had “a tough time” since last August.
“Investor confidence has declined substantially and a significant repricing of risk has occurred,” he says.
That’s not news.
But what he adds is worth noting.
“The Australian bond market has been affected by the global developments,” Mr Debelle says.
“Although not in a uniform way.”
“Issuance by financials has continued at pre-crisis rates, while corporate and asset backed issuance has dried up.
“The issuance that has occurred has been at substantially wider spread.
“A significant degree of reintermediation has taken place.”
Mr Debelle said Kangaroo bond issuance had been similarly affected.
However that market had “rebounded strongly” this year.
Readers will note that Private Briefing almost resisted the temptation to say well, that’s what kangaroos do, here. But back to the speech.
“Kangaroo bonds continue to account for a large share of the domestic bond market,” Mr Debelle said.
“Over 20 per cent.”
“And this market continues to be supported by fundamental factors that supported its growth over the past five years,” he added.
by Alan Thornhill
It might seem like over-stating the obvious, but the Reserve Bank wants us to know that there are significant risks ahead.
That was the message the bank’s Assistant Governor (Economic), Malcolm Edey, was pushing, when he addressed business leaders in Sydney today.
“Given the nature of the forces at work, it’s important to notice that there are significant uncertainties in both directions,” Mr Edey said.
He had listed four of them, in his summary.
- “…a good deal of momentum in domestic demand.”
- “rising terms of trade.”
- “higher interest rates and tighter lending standards” and
- “the slowdown now under way globally.”
“The global situation is one important source of uncertainty, Mr Edey said.
“As is the situation in world and domestic financial markets.”
“Another is the risk that the recent rise in inflation feeds back into wage and price expectations.”
“All of these will be important areas to watch in the period ahead,” Mr Edey said.
by Alan Thornhill
Who said this?
“I will not abrogate responsibility for the stance of monetary policy from the elected government to unelected and unrepresentative public officials in the name of fighting inflation first.”
You got it. It was Paul Keating, back in 1990.
That was well before the Reserve Bank was given a free hand, to raise or lower rates, as it saw fit. That is to act independently of government.
There was good reason for that change. Politicians could – and did – sometimes delay rate rises – that were necessary – because rate rises don’t look good before elections.
But there are problems with the new system, too. One is that adjusting interest rates is the only weapon the Reserve Bank has to fight inflation.
And no government is ever likely to give it more powers. The natural reluctance of politicians to hand powers to unelected officials is as strong now as it ever was. No matter who is in power.
The real problem, though, is that under the present system, a bare one third of the community is being asked – no forced – to carry much more than its fair share of the weight of the necessary adjustment.
That is mainly young families, who are paying off a mortgage. More than 1 million of these families were already in financial stress, before yesterday’s rate rise. That is, their housing costs were already swallowing more than 30 per cent of their combined income.
Yesterday’s rise will only add to that number.
Yet rate rises actually help those with a little money to invest.
One pensioner, for example, approached Paul Keating, at a social function in Sydney, while Keating was still in office, with an unusual plea.
“Whatever you do,” he told Keating, “don’t let those interest rates come down.”
There is no doubt, now, though that the nasty combination of high house prices and ever rising interest rates is making life miserable for millions of Australians.
Welfare authorities say, for example, that millions of Australian kids are not being fed as well as they should be, as a result of all this.
The biblical response, that “the poor are always with you” is not good enough, in an otherwise prosperous society.
The government is on the right track, in vowing to improve education, ports and roads, to remove bottlenecks. But that takes time.
No-one has accused the Reserve Bank of being overly imaginative, in tackling inflation. Perhaps that’s the government’s job.
But the present hybrid system is not meeting reasonable expectations in the fight against inflation.
It is asking too much of too few, while the rest escape.
by Alan Thornhill
The Reserve Bank raised interest rates by 25 basis points today, even though retail sales are flat and the US may well be slipping into recession.
Some economists will regard the decision as moderate.Â They had feared a rise of 50 basis points.
For the first time, though, the bank acknowledged that the forces which have pushed inflationary pressures to a 16 year high might be easing.
The bank’s governor, Glenn Stevens, said today’s rise had been made to contain and reduce Australia’s inflation in the medium term.
But the tone of his explanation was milder than many recent, overtly aggressive, warnings from the Reserve Bank.
Mr Stevens said simply that domestic demand in Australia had grown at rates appreciably higher than the nation’s productive capacity.
And he said labour markets are still tight, with shortages persisting in critical areas.
“Inflation is likely to remain relatively high in the short term and will probably rise further in year end terms,” Mr Stevens said.
But he said it would then “moderate” in response to slower growth in demand.
The latest rate rise, coming after a long string of similar rate hikes, will ensure that.
But Mr Stevens did make an admission.
“There is some evidence that some moderation in household demand is beginning to occur,” he said.
He admitted, too, that both business and consumer confidence had softened recently.
“…and household credit demand (is) slowing somewhat,” he added.
“Having weighed both the international and domestic information available, the board concluded that a further tightening of monetary policy was needed to secure an inflation rate of 2-3 per cent over time,” the Reserve Bank chief said.
More at www.rba.gov.au
by Alan Thornhill
The Reserve Bank chief, Glenn Stevens, is acting like Sylvester Stallone on steroids.
And Chris Richardson, of Access Economics, is predicting four fresh interest rate rises.
As Mr Richardson is a former Treasury wonk, we can rest assured that his old mates, back in the Department, are now giving very much the same advice to the Federal Treasurer, Wayne Swan.
So what are we, in the real world, to draw from all this?
The first thing to be said is the obvious. Interest only investments are looking pretty good, right now.
Especially as the returns on 90 day bank bills, right now, are at their highest point since the Y2K panic.
But what would cooler heads see in all this?
Due allowances must always be made, for the way things actually work in the real world.
The Treasury and the Reserve Bank are both appalled by Kevin Rudd’s plan to introduce $31 billion worth of staged tax cuts, over the next three years./ Especially as those tax cuts will start from July 1.
The legislation, to put that into effect, is already before parliament.
Meanwhile, like all analysts, Chris Richardson has done his sums. The results shocked him.
He gives Kevin Rudd’s razor gang very little chance of finding big enough cuts to make, in Federal spending, to offset Australia’s already high inflationary pressures. Let alone those still to come, from Kevin Rudd’s tax cuts.
So Chris Richardson is almost alarmist, on the outlook for interest rates.
That is, of course, except for those lucky people who happen to have a few hundred thousand dollars, lying idle, and looking for a place to rest, profitably, for the next few years.
Their prospects are bright.
But is Chris Richardson right?
Private Briefing doesn’t doubt that Chris got his sums right.
But, as always in economics, it is not so much the data, but the part of the data that you choose to look at, that matters.
And the part of the picture, that both Access Economics and the Reserve Bank do seem to be overlooking is the sharp downturn now evident in the US economy.
It’s impact, on Australia, comes down to a matter of timing.
Both Stevens and Richardson are betting that America’s slump will take some time to hit the Australian economy.
Yet it’s first effects are already here.
Australia’s banks are already charging their home loan customers more, because they have to pay more for the money they lend.
Although Australia doesn’t export all that much to America directly, our biggest customers, China and Japan, do.
And China has problems of its own. Severe winter storms have not only disrupted food supplies there, but pushed that country’s inflation rate above 7 per cent.
So we can expect to see some sharp remedial action there, too.
In other words, if America slips into a recession, or even something very like a recession, that is likely to hit Australia’s economic growth, too.
And, if that happens, those nasty inflationary pressures, that now torment the good and the great, could suddenly become yesterday’s villians.
by Alan Thornhill
The days of easy money are over for Australia’s banks.
As the ANZ noted yesterday, they are now having to make “increased provisions” for bad debts at the big end of town. That’s a direct result of the credit crunch, whose ripples are still spreading from America.
But their troubles don’t end there.
A new survey shows that many of their home loan customers, too, are starting to get into trouble.
That’s a worry. Home lending accounts for a big slices of the business of Australia’s big banks.
The survey, by Datamonitor, shows that 24 per cent of their mortgage holders now expect to find it either “quite hard” or “very hard” to keep meeting their repayments, over the next five years.
And that, of course, implies a substantial risk of default.
Especially as the Reserve Bank seems quite determined to keep raising interest rates, to squeeze inflation.
The worst that can happen, in these circumstances, is a rise in defaults and distress sales.
And that, in turn, could cause property prices to collapse, either locally, or broadly.
There is, of course, no certainty that this will happen.
But there would be plenty of pain to go round, if it did.
The Research firm, Datamonitor, is quite blunt in its conclusions.
“Australian home borrowers experience financial stress,” it says.
Its financial services analyst, Petter Ingmarsson, blames a toxic mix of rising house prices and increasing interest rates.
He said this had caused home loan affordability in Australia to “hit an all time low.”
Staying in the rental market isn’t helping young families much, either.
“High rental costs have also made it harder for many to raise a deposit,” Mr Ingmarsson said.
If we, at Private Briefing, were able to predict how all this will pan out, we wouldn’t be slaving over hot computers, before dawn each day.
We would, instead, be sitting on a beach, somewhere in the south of France, with our feet in buckets of champagne.(Thanks, again, to the late Bert Kelly, for that thought).
What we can say, firstly, is that the present situation in Australia’s housing market is showing some signs that are to be expected of a classic bubble.
And, secondly, Australia’s banks now have major challenges on their hands, both at the debt ridden top end of town, and in their exposure to Australia’s overheated mortgage market.
This, clearly, is a situation in which the Reserve Bank should tread very carefully.
Its record, though, back in the 1980s, when it pursued stop-go policies, shows that it does not always do so.
Weathercoast by Alan Thornhill
A novel on the murder of seven young Anglican Christian Brothers in the Solomon Islands.
Available now on the iTunes store.
Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.
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