Australia's economy is in quite spectacular shape. It is into its 23rd year without a recession.
Australia's economy is in quite spectacular shape. It is into its 23rd year without a recession.; Australian economy poised to shift into a higher gear
Tweet Topic Started: 11 Aug 2014, 05:07 PM (510 Views)
With this being my second to last article for Business Spectator, I want to deal with the concept of good economic management.
Don't let this put you off, but the issue of what is a 'good economic manager' has been clouded by the hysteria of recent years and what has generally been an unquestioning dogma on what economic policy is all about.
Let's start at the end.
At a macroeconomic level, if policy makers in Australia can deliver annual GDP growth at 3 per cent, inflation between 2 and 3 per cent, an unemployment rate at 4 or 5 point something, and preside over rising living standards, this is almost perfect. It is as good as it gets.
For all credible economists, this is the unquestioned, universally agreed end game for policy makers.
The budget surplus or deficit, level of debt, interest rates and value of the Australian dollar are the tools used to achieve those objectives and are not the target in themselves.
This is a fact so often overlooked in the misrepresentations of low interest rates as good, the level of government debt as bad and the deficit as a sign of mismanagement. Many people mistakenly think these should be the target and not the levers pulled by policy makers.
Think about it.
What good would a budget surplus be if the economy were in recession and the unemployment rate were 8 or 10 per cent?
What good are low interest rates if 5 per cent inflation is eating away at consumer purchasing power and Australia's international competitiveness?
Or, perhaps viewed the way it should be, how good is it when policy makers run a temporary budget deficit to keep the unemployment rate at 5 point something or that high interest rates cool the economy to lock in low inflation?
It comes back to the point I have often made in my Business Spectator writings. Any monkey with an excel spreadsheet can deliver a budget surplus. Cut government programs and spending and hike taxes and there you have it, the budget is in surplus.
This simple approach is unhelpful as it takes no account of the position of the business cycle.
A budget deficit is like a cold and rainy day.
Is a cold and rainy day good or bad?
If you are holiday maker at the beach then clearly no, it is dreadful. But if you are a farmer on land that has not received much rain over the prior two years then having the skies open and widespread rain is delightful.
So too is a budget deficit. In a booming economy, a deficit is inappropriate, while in a period of weak growth, it is highly desirable.
This is why suggestions that one side of politics or the other will have lower interest rates or will always have a surplus are misguided.
It is what happens to GDP, inflation and unemployment that largely determine the level of interest rates, and the state of the budget and whether the economy has been well managed.
And what's more, bad luck can get in the way of the best policy settings. A global recession, an inexplicitly overvalued Australian dollar or a natural disaster can have consequences for policy bottom lines and the real economy.
If the world is weak, interest rates will inevitably be lower and the budget more inclined to be in deficit. And that is the way it should be, because these policy reactions will help to insulate the local economy from the negative global news. It would smack of policy incompetence if interest rates remained high and the government cut spending and hiked taxes to ensure the budget stayed in surplus.
And this is the notion I have always had at the forefront of my thinking when writing about the budget, government debt and interest rates for Business Spectator. Many of those loyal readers commenting on my articles share a different view. However that view implies a preference for recession, high unemployment and a budget surplus, to the alternative that we have seen over recent years.
In the end, Australia's economy is in quite spectacular shape. It is into its 23rd year without a recession, it's been more than a decade since unemployment has been at 6 per cent and inflation over the last two decades have averaged 2.5 per cent. At the same time, Australians are among the richest people in the world with the International Monetary Fund data showing per capita GDP in US dollar terms fifth in the world behind only Luxembourg, Qatar, Norway and Switzerland. That is hugely impressive.
It seems someone has got the macroeconomic policy settings right and for that we should be very pleased.
"23rd year without a recession" is not necessarily a good thing. It certainly doesn't imply that "Australia's economy is in quite spectacular shape".
I will sound like an old fart when I say this, partly because I am.
Bigger isn't always better (unless you ask my missus).
I feel sorry for the kids of today because they drive down south on a freeway and visit a packed surf beach where there is nowhere to park.
We drove down empty winding country roads and had the place to ourselves when we got there.
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
Recent data shows the economy is poised to shift into a higher gear against growing expectations that the Reserve Bank will cut rates again.
That’s not to say that the June quarter GDP figures out in a few weeks are going to be strong. My expectation is that the GDP figures will be nondescript -- 0.5 per cent or thereabouts. As mining investment unwinds, GDP could even cease to be a reliable indicator of the broader economy. This is because mining investment is such a small component: it’s about 6 per cent of GDP and 2 per cent of the labour market.
If mining investment slumps 30 per cent while the remaining 94 per cent of the economy pumps out growth well above trend at 4 per cent, is the economy strong or weak? Headline figures may not be much more than 2 per cent, but jobs growth will be strong etc.
What matters far more than the June quarter GDP outcome or even the long-expected mining investment slump (when that finally does occur) is confidence. Look at everything that’s weighing on the economy right now. Non-mining business investment is at recessionary levels. We have high rates of consumer savings and subdued credit growth. This is all symptomatic of a confidence crisis. Our policymakers are dominated by it and politicians on both sides are cultivating it, putting spin above the interests of the nation.
Against all that, the rebound we’ve seen in both business and consumer confidence lately is phenomenal. It’s occurred against headlines declaring unemployment at a 12-year high and set to go higher! That we have to slash our wages, that the mining boom is over and a downturn imminent!
It’s a good omen, then, that the long-awaited turn in confidence looks to be underway, even with those headwinds. The implications for the economy are profound. If current trends persist (and there is no reason to think they won’t), then we should see a rapid acceleration in non-mining investment and consumer spending.
That there are few impediments to this upswing ensures that when it does occur, its duration could be lengthy. Debt is not the constraint to growth that some people think. It is high for consumers, but then the cost of servicing debt is low -- at decade-lows for consumers and even better than that for business.
In fact in the corporate sector, balance sheets are pristine. Perhaps more importantly than that, we’re not coming out of either a broad-based housing or business investment glut. There are patches -- apartments in inner city Melbourne, for instance. But on the whole there are few imbalances of that nature to worry about.
The great hilarity is that, if anything, the RBA is set to cut again. Now I’m not endorsing that approach, I think it’s insane -- regular readers will know that I don’t agree with the path that policymakers have chosen. Indeed I find it extraordinary that some of the loudest fearmongers on debt are the strongest advocates of further easing. Lower rates will lead to higher debt; it’s pretty simple.
My disagreement stems from the fact that the underlying economy was always sound, and the slump we saw in confidence from 2011 was largely due to the actions and rhetoric of policymakers and other PR. There was never anything wrong with our economy. If they do hike, then even then, everyone is in agreement -- the tightening cycle will occur over a very long time period and rates are never going back to pre-GFC highs. They can’t.
Even in this low-confidence environment, it’s a testament to how strong our economy actually is that GDP has been growing at an above-trend pace (with the exception of three anomalous quarters of growth) for about three years. The only real difference now is that house prices are surging, bank profits are soaring, as you would expect. With confidence on the mend, there is very little that will change that, and the most likely outcome is that this momentum will build.
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