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Abbott stumbles into a surplus of luck

Stephen Koukoulas

US stocks are up about one per cent this morning, Asian stocks were up be an even larger amount yesterday and the economic news continues to show more and more signs of strength.

Tony Abbott not only won the election by a thumping margin, but it looks like he won the prize of forming government at a time when the world economy is on a synchronised upswing, commodity prices are trending higher and the current easy domestic policy settings will propel Australian economic growth to a level not yet anticipated by Treasury.

This will be great news for the unemployment rate which by 2015 could well be looking to break toward five per cent or lower and the revenue flows to the government will result in a likely early return to budget surplus and then move to quite hefty surpluses after that. This will only be enhanced with any cuts in government spending that Abbott will deliver in the months ahead (No time for Abbott to hover with the knife, September 10).

The political downside, as there always is in economics with just about everything that happens, is that interest rates are soon to be moving higher – perhaps quite a lot – and the Australian dollar is also likely to appreciate and have a look at parity with the US dollar at some stage in the next year or so (The dollar rolls away from the RBA, September 5).

This tightening of monetary conditions will be essential if Australia is to avoid a troublesome lift in inflation.

The recent data flow from China over the weekend and yesterday showed a clear bottoming in the cycle and perhaps the early hints of a lift in growth without worrisome inflation.

The trade surplus in China was driven by solid seven per cent plus growth in both exports and imports. This lift in Chinese trade flows suggests that global trade is also strengthening, which is always a reliable, coincident indicator for the health or otherwise of the global economy. China’s monthly trade surplus was $US28.6 billion ($31.1 billion).

The inflation data in China were also quite benign. The rate of decline in the producer price index eased, dropping 1.6 per cent in the year to August – a little firmer than the annual decline of 2.3 per cent last month. The consumer price index was also well behaved, rising 2.6 per cent, which was spot on expectations and a touch lower than the 2.7 per cent inflation rate recorded the previous month.

This low inflation climate is critical news for the authorities in China, especially the People’s Bank of China, which can hold policy at an easy setting until the economic pick-up gains more traction and then lock in an expansion for GDP growth at between seven and eight per cent.

In Japan, it appears that the super-stimulatory policies of Prime Minister Shinzo Abe are working. GDP growth in the June quarter rose at an annualised pace of 3.8 per cent, a sharp upward revision from the initial estimate of 2.6 per cent. This stellar growth rate for Japan, which is the fourth largest economy in the world, follows economic growth of 4.1 per cent in the March quarter.

So solid is the growth momentum in Japan that the government is considering raising the sales tax rate from five per cent to eight per cent as it addresses the very obvious fiscal problems which are summed up in Japanese government debt levels above 200 per cent of GDP.

Today, China sees data on retail sales and fixed asset investment. Further momentum in these indicators would help lock in the optimism about a lift in growth in the second half of the year.

Reinforcing the view of better economic conditions around the world also shows up in my favourite indicator, commodity prices. In board terms, they continue to move higher despite the massive increase in output that is unfolding as a result of the global mining investment boom. There is something going on in the world with the prices of iron ore, copper, gold and a range of other commodities being up rather than down when compared to prices a couple of months ago.

All of this is great news for the Australian economy, which remains closely entwined in the global economy and to changes in commodity prices. With housing activity already marching higher, consumer sentiment at a decent level – even before the election – and exports on a roll, it is to be hoped that Treasury and the Reserve Bank will be revising their GDP forecasts higher and the unemployment outlook lower over the next few months.

The good economic times are starting to unfold.

Read more: http://www.businessspectator.com.au/article/2013/9/10/australian-news/abbott-stumbles-surplus-luck

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Why this is a bad time to win an election

Steve Keen

Kevin Rudd came to power for the first time on December 3rd 2007, just a few months after the global financial crisis commenced, and some time before its severity was truly appreciated by the political classes of any nation. On September 7, he lost office for the last time.

The first election he won was a bad one to win, not because he was blamed for the calamity of the GFC itself of course, but because his entire term was dominated by reacting to it.

That reaction had parts that could be rubbished (everything from the Liberal Party’s favourite farce of the Pink Batts program to my pet hate, the First Home Vendors Boost) but a simple comparison of Australia’s economic performance to that of the rest of the OECD over the last six years shows that his reaction worked – see Figure 1, which shows unemployment in Australia, the US and Ireland. Unemployment never exceeded six per cent here, and growth turned negative for only one quarter. The US, on the other hand, had its longest post-war recession ever, and Europe’s obsession with austerity turned its downturn into a genuine second Great Depression.

Figure 1: Australia handled the GFC much better than the US or Europe



Of course, though Rudd had bad luck to take over when this crisis was just beginning, he also had good luck on his side as well – not least that our biggest trading partner undertook an even bigger government stimulus in response to the crisis that gave us the best terms of trade in our history, and our biggest export boom.

So could this election be a good one to lose? Not for Rudd, of course. Surely there’s no way he will emulate “Lazarus with a triple by-pass” and make a comeback from this electoral defeat. But the ALP will hand over the reins of government to the Liberals at much the time that luck is no longer playing on the Australian side. If so, this will be unusual, since normally timing has played into the Liberals' hands rather than Labor’s.

Gough Whitlam’s victory over William McMahon in December 1972 took place at the beginning of one of the last booms in Australia’s generally booming Post-WWII economy. It will be hard for readers under 60 years old to appreciate this, but the average unemployment rate in Australia from 1950 till 1972 was below two per cent. However, shortly after Whitlam took power, the boom gave way to a huge bust.

The deterioration of the economy then was blamed on the Whitlam government’s policies, but the evidence is clear that he simply had the misfortune to come to power just when the long post-war boom was unravelling. As Figure 2 illustrates, however much Whitlam might have been ridiculed locally for the Khemlani affair and the like, the collapse in economic growth and the rise in unemployment during his term was a global phenomenon. His problem wasn’t bad economic management, but simply bad timing.

Figure 2: The downturn blamed on Whitlam was a global phenomenon



Malcolm Fraser, on the other hand, was the one post-war example of a Liberal leader taking over from a Labor one at an inopportune time. The Liberals won that election on the basis that they were better economic managers than Labor – “just look at the evidence!” – but history shows that it was simply bad timing for Labor that was followed, on the surface at least, by bad policy by Fraser’s Liberals. Unemployment continued to get worse under Fraser (with Howard as his Treasurer), despite his very different approach to economic policy to Whitlam (and Jim Cairns), and this bad performance on unemployment was the opposite of what happening in the US at the time.

Hawke, on the other hand, took over from Fraser at almost the perfect time internationally. He and his “world’s greatest treasurer” Paul Keating could bask in the success of their economic policies, but again the Australian performance at the time largely mirrored what was happening in the US when Ronald Reagan was in the White House, and followed a very different political and economic agenda to Hawke and Keating (see figure 3). It was the politician’s timing that mattered once again, far more so than the politician’s policies.



Ditto John Howard when he downed Paul Keating. By then, Australia had recovered from “the recession we had to have”, and the economy was improving in both Australia and the US, despite the fact that one country now had a conservative government and the other had Bill Clinton’s Democrats in power (see figure 4).



Then along comes Rudd, and though yet again timing far more than his policies dictated the economic circumstances of the day, the undeniable fact is that Australia’s economic performance diverged from that of the rest of the world (see figure 5). Rudd’s policies – or rather those proposed by his Treasury Secretary Ken Henry of “Go early, go hard, go households” that Rudd adopted with gusto – worked.



So if – with the sole exception of Rudd – it wasn’t the policies of politicians that determined the fates of their economies, what was it?

It was their timing relative to the global debt bubble that has determined the fate of Western economies ever since the early 1970s (see figure 6, which shows the rises and falls in the rate of growth of private debt in Australia and the US since 1970).

Whitlam had the great misfortune to come to power six months before the first popping of the bubble in mid-1973. Rudd was even unluckier; his first term began literally when the global recession commenced as the debt bubble had its biggest pop in history.

Fraser was, in some ways, the unluckiest of all: he came to power after the 1973 bursting of the debt bubble, but whereas the US then had another debt-driven revival, Australia didn’t. So the economy languished under him, not because of his policies (which were largely irrelevant), but because debt growth took a lot longer to rise again in Australia than it did in America after the 1973 crisis.

Hawke and Howard, on the other hand, had the fortune to come to power as the debt engine started revving again.

Figure 6: Riding the waves of the private debt bubble



So what could the future hold for Prime Minister Abbott? Here I have a hunch that he’ll end up suffering a similar fate, not to the previous Liberal leader he admires – John Howard – but to one I expect he detests – Malcolm Fraser.

Fraser, as noted, had the good fortune to take over from Whitlam after the bursting of the debt bubble was largely over, but the bad fortune that the revival in Australia's bubble was considerably more anaemic than America’s. Abbott could well find himself experiencing a similar double-edged sword of fate. He will take over when the deleveraging that caused the GFC has come to a temporary halt, and demand will be rising in the US (and maybe even in Europe, from the depths of its self-imposed Depression) thanks to rising private debt (see figure 7). But this rise could peter out even more quickly than it did for Fraser, leading to anaemic economic performance that will be blamed on the politician rather than the times.



Australia also faces the headwinds of a possible bursting debt bubble in China, something that is also beyond Abbott’s control. Our new prime minister may find that he lives in interesting times, rather than favourable ones.

Read more: http://www.businessspectator.com.au/article/2013/9/10/economy/why-bad-time-win-election