Thread: Australia & Lessons Learned

Some more about the stimulus.

Shock tactics

September 5, 2009


The Rudd Government's continuation of the stimulus program is essential as it seeks to restructure the economy.

SHOULD we laugh or cry? Australia is the economic champion of the world. Of the 33 advanced economies in the world, ours is the only one to have grown in the past year. The latest national accounts, released on Wednesday, suggest that the economy grew by 0.6 per cent in the June quarter and by 0.6 per cent in the past year.

This compares with an average fall of 4.6 per cent for the major advanced economies, the biggest contraction in more than half a century. Australia leads the pack, but with an utterly measly growth rate. It has managed to avoid a recession in what is regarded as a technical sense - two consecutive quarters of falls in GDP - but is experiencing a recession's consumptive half-brother, a credit squeeze.

What is the truth of Australia's status as the world's champion performer? According to the Treasury, without the economic stimulus measures implemented by the Rudd Government since late last year Australia would be in recession too. Without the stimulus, our economy would have contracted by 0.3 per cent in the three months to June and by 1.3 per cent in the 2008-09 financial year.

So our economy is being propped up to produce this result. The other economies have been propped up by government actions too, including financial bail-outs and spending programs, but with less apparent success. Even so, the Treasury figures should give pause to those who think the worst is over or that there are not some serious underlying problems in the nation's economic performance. Yesterday The Age reported on the Finance Minister Lindsay Tanner's concerns about the size of the current account deficit, which has been a festering problem within our national economy for several years.

Australia is now deeply entrenched in the habit of borrowing to sustain its lifestyle. As Tanner says, this leaves us exposed to external shocks. Then again, no country has been able to insulate itself from external shocks in the past 18 months.

It could not have been otherwise given what has happened in the US. Nobel Prize-winning economist Paul Krugman notes in an article in this weekend's New York Times on the failings of contemporary economists that American households have seen almost $16 trillion in wealth evaporate, and more than 6 million jobs vanish since last year. There's nowhere to hide from that sort of economic shock.

Even so, since the late 1990s in Australia, the economic debate has had an unhealthy, politically driven focus on the finances of the federal budget sector rather than on the national economy. The nation's debt levels have risen steadily in that time, although you would hardly know it because the media's chief concern has been on whether the federal budget was in deficit or surplus.

Government sector debt does matter, but it is only one element of the national economic performance. Developing ways of advancing productivity and overcoming structural weaknesses in the economy matter much more.

The really big problem that the Rudd Government and its Treasury advisers face in 2009 is that the global economic situation is so dire that those structural reforms have had to be set aside. It is relatively easy to establish a sort of micro-critique of the Government's stimulus package - the dead people or expatriates who were sent cheques for $900 or the school given finance for a multi-purpose building that didn't fit its available land.

There's plenty that could and has gone wrong with the Government's stimulus programs, but that was always going to be the case. What Kevin Rudd, his cabinet and the Treasury saw coming Australia's way last year was a financial tsunami.

Their choices were straightforward: do nothing; take the time to tailor spending to avoid any waste, by which time the recession would have landed here; or throw everything but the kitchen sink at the economy in a hurry as a way of maintaining activity and staving off recession. They took the third, least efficient, most expensive option in the full knowledge that some of the money would be wasted.

But their reasoning was simple. Because the Australian economy is so exposed to external shocks, confidence is all-important. Investment and demand are driven by confidence; they're what convince employers to hold on to their employees. So, potentially as wasteful as it threatened to be, the stimulus program was put in place.

By and large, it has worked out, although the results are lumpy. Residential housing construction activity is very strong but commercial construction activity has dried up. Credit is hard to find. Retail spending has fluctuated, but seems reliant on Government hand-outs. Sales of vehicles are down 14 per cent over the year.

According to the Bureau of Statistics, unemployment was 5.8 per cent in July. This figure seems soft; the drop-off in employment seems bigger than that. For example, at least 80,000 manufacturing jobs have been lost in the past year and the take-up in unemployment benefits suggests higher real levels of joblessness than the ABS has so far turned up.

As activity driven by the stimulus starts to fade later this year, new problems will emerge for the Government. Annual GDP growth of 0.6 per cent is nowhere enough to generate employment growth; unemployment will continue to rise.

And there is the debate about how the Government pays for the money it borrowed to finance the stimulus. Does it hold on and bank on increased revenues to repay its borrowings further down the line, or does it cut into budget programs in the next budget in an effort to get ahead of the curve? The prospect of severe spending cuts to improve the budgetary position is real, even if it threatens to dampen economic activity.

There is simply not enough encouraging news around right now for the stimulus to be withdrawn ahead of time. In important respects, the mildly positive economic figures issued this week are illusory - government pump-priming of an economy in which the fundamentals need a lot of repair. And that restructuring work cannot begin until the crisis is over, which is some way off.

Shaun Carney is associate editor

Shock tactics

This gives a little glimpse into the background to all this. There have been some squabbles recerntly about economic history in Australia - 'nusiness as usual' for politicians.

For those unfamiliar, the Hawke/Keating government was a left wing government that pretty much pioneered the 'third way' for which Blair is often given credit - a combination of neo-liberal economic reform & policies aimed at social justice. The Howard government bore a lot of similarities to a cross between Britain's Tories & the GOP, especially on economics.

Economic medicine went down a treat thanks to Howard

September 16, 2009

Kevin Rudd needs to give credit where credit's due.

WHENEVER I renew my gym membership I have to fill out a long medical questionnaire designed, no doubt, to get it off the hook should anything untoward happen. But on the question of whether I have a problem with high blood pressure, I'm never sure what to answer. My pressure's low, better than many people my age, but that's because I always take my pills.

Don't be misled by the mildness of this recession into thinking we didn't have a problem in the first place. The pills of budgetary and interest-rate stimulus are working well.

Even so, John Howard, Peter Costello and the Liberals are entitled to a lot of the credit for our present position. In seeking to deny them that credit, Kevin Rudd is being disingenuous and churlish. In other words, although our position owes much to the size and speed of the Government's - and the Reserve Bank's - response, it also owes much to the good state we were in when the global financial crisis hit a year ago. And the economy's state was largely the consequence of Rudd's predecessors' policies.

One of our greatest strengths compared with the Americans, British and other Europeans is that although some of our lesser financial institutions have failed, our banks have been rock solid. The trouble facing most of the rest of the developed world is because their banks are in trouble.

Howard and Costello deserve the credit for this. They resisted pressure from our big four banks to allow them to merge and become ''national champions'', continuing their predecessors' Four Pillars policy and thus helping to keep our banks out of trouble.

Just as importantly, Costello completed reform of the regulation of our financial sector, placing prime responsibility in the hands of the Australian Prudential Regulation Authority. Part of the Americans' problem is that responsibility in their system is shared between four or five buck-passing authorities.

The Liberals' other great contribution was to have returned the federal budget to surplus and paid off the Federal Government's net debt.

Here it's important to remember - as the present Opposition seems to have forgotten - that the great advantage of returning the budget to surplus and eliminating debt is that it leaves you well placed for the next time you need to run up deficits and debt in the interests of stabilising the economy.

All this was implicit in the Howard government's stated medium-term objective for budgetary policy, to maintain the budget in balance only on average over the course of the economic cycle. Budget deficits are appropriate when the economy is very weak; budget surpluses are appropriate when it's strong.

It was because our fiscal (budgetary) affairs were in such good order that there needed to be no hesitation in the decision last October for the Government to spend big in an effort to reduce the downturn. (Remember, however, that the downturn would have pushed the budget into deficit even without any additional spending - that's how budgets work.)

By contrast, the Americans and most of the Europeans had big budget deficits and high levels of accumulated debt when the crisis hit. That didn't stop them spending heavily to stimulate their economies and bail out their banks - needs must when the devil drives - but this is why there is now so much worry about the huge levels of debt the developed world is acquiring.

The need to service and slowly pay down this debt will be a major constraint on the world economy for many years. This will adversely affect us to some extent, but our debt problem is chicken feed in comparison.

Looking at it more broadly, our economy is a lot more flexible and resilient than it used to be. It's better able to roll with whatever punches the world throws at us. And you have to give the Howard government its share of the credit for this. For a start, it established a much better set of arrangements for the day-to-day management of the economy, setting the aforementioned medium-term objective for the budget and formally accepting that interest rates would be set by the Reserve Bank independent of the elected government.

It also introduced the long-feared goods and services tax - a much-needed reform - cut the tax on capital gains, privatised Telstra, ''marketised'' child care and job placement, and attempted to introduce WorkChoices.

Most of the structural reform that so changed our economy was done by the previous Labor government: deregulation of the financial system, floating the dollar, phasing out tariff protection, sundry privatisations and deregulations, competition policy and moving to enterprise bargaining.

Now that they're out of office, Howard and Costello are happy to acknowledge the Hawke-Keating government's considerable role in transforming our economy, though, like Rudd, they refused to admit it at the time.

No former government's record is unblemished, however. Hawke and Keating presided over a severe recession and Howard did, as Rudd charges, leave us with less to show for the resources boom than he should have, particularly in his neglect of productivity-enhancing investment in infrastructure and education and training.

Ross Gittins is a senior writer.

Ross Gittins

Interesting. We're out of recession as well and all we've done so far is talk about building a cycleway the length of the country.

Originally Posted by Parihaka

Interesting. We're out of recession as well and all we've done so far is talk about building a cycleway the length of the country.

Thats because most employable New Zealanders live in Australia & send real money home Pari. Please try to keep up.

Originally Posted by Bigfella

Thats because most employable New Zealanders live in Australia & send real money home Pari. Please try to keep up.

Is that what that stuff is, I thought it was funny coloured dunny paper


Mental note to self: clean out long-drop at earliest possible convenience.

Originally Posted by Parihaka

Is that what that stuff is, I thought it was funny coloured dunny paper


Mental note to self: clean out long-drop at earliest possible convenience.

Last time I checked we made ours from plastic (well, polymer I think). I'm afraid to ask what this means about the insensitivity of the average kiwi arse (or how they got that way). ))

I was talking to two Peurto Rican brothers that came to work for the company i work for today and asked them why they decided to leave the states and come to Australia for work.

Reply 'more work down here'

I was shocked. People leaving the US (probably the one country after Australia that people have always headed to in search for a better life) and they are coming to Australia... In search of a better life.

Mind you i dont want you Yanks getting any ideas about sending us your Mexicans, a couple of Peurto Ricans are enough for us at the moment ) (even if we do call them 'the Mexicans')

Originally Posted by Parihaka

Interesting. We're out of recession as well and all we've done so far is talk about building a cycleway the length of the country.

And I though your economy was mostly based on Lord of the Rings merchandise and tourism.

Originally Posted by Tarek Morgen

And I though your economy was mostly based on Lord of the Rings merchandise and tourism.

Where exactly do you think the cycleway will be going, and who do you think they are hoping will use it? Come on Tarek, try to pay attention.

Oh, and you forgot the boiling mud.

but...did anyone tell them that their land consist out of two different (main)islands? Will they simply build a cycleway that leads into the water??

I think I might contribute to the thread BF :p
From:
Low and medium-high income earners priced out of property market | The Australian

Low and medium-high income earners priced out of property market

Pia Akerman | September 14, 2009

STUDY of national home ownership rates has painted a grim picture of the difficulties both low and medium-high income earners face getting into the housing market, as average house prices have trebled since 1996.
Home ownership down by 15 per cent

Researchers from Flinders University, led by adjunct professor Joe Flood, today released their findings, concluding that Australia's housing market is in "a very dangerous and unstable situation''.

Despite strong economic growth and relatively low interest rates between 1996 and 2006, overall home ownership only grew by 0.8 per cent.

"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance,'' Dr Flood said.

The study - based on census data - found home ownership fell by 15 per cent between 1986 and 2006 for both low income earners over 45 and medium-high income earners under 45.

As expected, the First Home Owners Scheme boosted home purchases for people under 25, but the study found many lower income earners between 25 and 44 were unlikely to ever own their own homes because baby boomer parents were spending their inheritances and housing prices remain high.

"As long as the government, the public and the media remain in denial, and self-congratulatory rhetoric continues that Australia has cleverly avoided the housing market correction it needed to have, there is little chance that matters will improve,'' Dr Flood said.

"The only ways that this would happen are through a US-style price collapse or a complete re-evaluation of the situation and a coordinated effort by governments, planning and financial institutions to restore the balance between housing supply and demand - or tax away the imbalance - so that all Australians may benefit.

"If rises in national income continue to disappear into higher house prices as they did during the study period, Australia will have to get used to being a country of low home ownership, people living with their parents, and small houses by international standards."

Originally Posted by Tarek Morgen

but...did anyone tell them that their land consist out of two different (main)islands? Will they simply build a cycleway that leads into the water??

Its no bloody wonder no one likes Germans Tarek. Always pick, pick, pick. Surely you are aware that wool is surprisingly bouyant. I'll leave you to work out the specifics. )

Originally Posted by Chunder

I think I might contribute to the thread BF :p
From:
Low and medium-high income earners priced out of property market | The Australian

The unafordability of housing was the big sleeper in the '07 election. Labor couldn't make too big an issue of it because it still felt vulnerable on interest rates, so they couldn't tackle it as head on as they might have. I think there were a lot of people who were sick of being told how prosperous they were while they were spending every cent on a house that most would consider 'ordinary'. Rudd doesn't need to deal with this straight away, but he will need to deal with it.

I found some critisisms about Pia Akerman so I thought i'd post from another source which is a bit more in depth
From the business spectator

Home ownership out of reach: study - News - Business Spectator

NEWS
Published 5:24 PM, 14 Sep 2009
Last update 0:50 AM, 15 Sep 2009




Home ownership out of reach: study

The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers.

Analysis by researchers from South Australia's Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period.

The Flinders Institute for Housing, Urban and Regional Research analysis found home ownership fell by 15 per cent over the two decades to 2006 for low income earners over 45 years of age and medium-high income earners under 45 years.

Other findings included large gains in national income from the resources boom were "wasted" by increasing house prices and accumulating debt to unreasonable levels.

The analysis found the first home owners scheme boosted home purchases for people under 25 years of age but many lower income earners in the 25-44 age bracket were unlikely to ever own their own homes because their parents were spending their inheritances and prices remained high.

Dr Joe Flood, the institute's adjunct professor, said the "the writing is on the wall for the 'Australian dream'."

"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance," Dr Flood said in a statement on Monday.

"As long as the government, the public and the media remain in denial, and self-congratulatory rhetoric continues that Australia has cleverly avoided the housing market correction it needed to have, there is little chance that matters will improve.

"The only ways that this would happen are through a US-style price collapse or a complete re-evaluation of the situation and a coordinated effort by governments, planning and financial institutions to restore the balance between housing supply and demand - or tax away the imbalance - so that all Australians may benefit."

Dr Flood and his team assessed Census data to conclude that Australia's housing market is in "a very dangerous and unstable situation which has received little adverse attention".

The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.

"On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse ... or to a long slow decline as in Japan since 1988," Dr Flood said.

Personal finance commitments slide

Soft monthly business lending figures have highlighted the choppy nature of the economic environment and diminished the chance of an interest rate rise by the end of the year, economists said.

Total commercial finance fell one per cent, seasonally adjusted, to $25.857 billion, after falling 7.6 per cent to in June, the Australian Bureau of Statistics (ABS) said on Monday.

It was the weakest result since August 2005 when it touched $24.424 billion.

CommSec economist Savanth Sebastian said the result meant the Reserve Bank of Australia (RBA) would hold interest rates at three per cent until it sees more evidence of sustained economic recovery.

"Overall the lending finance data tends to suggest that lending has turned the corner," he said.

"You're not seeing a substantial improvement yet, but there are really signs that businesses are coming back into the fray."

The ABS data also showed personal finance commitments fell 0.8 per cent in July, seasonally adjusted, to $6.849 billion.

Housing finance for owner occupation fell 1.7 per cent to $16.884 billion in July, after rising one per cent in June.

However, leasing finance rose 30 per cent in July to $436 million, compared with a 17.2 per cent fall in June.

(comment: leasing has its appeals on oh-so many grounds in current cliate)

"This data really is encouraging, but it highlights the choppy economic environment we are still in," Mr Sebastian said.

Housing starts to increase

Meanwhile, the number of housing starts is expected to increase over the next two years, but Australia will still be nowhere near meeting demand for housing, a report says.

The Housing Industry Association (HIA) says in its latest National Outlook report that the number of housing starts is expected grow seven per cent in 2009/10 to 141,660 and by 15 per cent in 2010/11 to 162,850.

The HIA's 2009/10 forecast was largely unchanged from the March quarter outlook, but the 2010/11 estimate was revised upwards from 146,000.

HIA chief economist Harley Dale said a more optimistic outlook for the economy, as shown by recent private sector surveys on business and consumer confidence, was behind the higher estimate for 2010/11.

"There is just a general improvement in mood," Dr Dale said on Monday in a statement.

"It creates the potential for a broader based recovery, where we get a lot more existing home buyers trading up into the new home market.

"Hopefully by late 2009 and early 2010 we get some investor interest coming back into the market."

Despite the predicted pickup, the 162,850 housing starts in 2010/11 was still well shy of the estimated 190,000 new dwellings the HIA says is needed to satisfy underlying demand.

"Relative to underlying demand the level of housing starts we are forecasting is far from a bullish view," the HIA said.

The report said the [b]lack of adequate land supply[b] (what a crock of shite, the government, at least the SA government, won't release the land IT owns marked for future developement because it wants to cash in!), high new home taxation (what about stamp duty!) and a lack of skilled labour represented "considerable supply side constraints".

A few comments.

Im in the processs of buying some land because the equity value in it means a quick leg up in building equity over the relitively short period of the loan. I have bugger-all interest in the property in reality except only as security.

I consider myself very lucky to have the opportunity I do at the moment. Don't get me wrong though - unless you have significant equity and confidence in the housing market to (eventually) own a secure roof over your head - there is not much point spending at least in this state, over 300 000 k for a house, more like 250k. I can't really say for sure how expensive adelaide itself is comparitively to the rest of the world, as there are various surveys with conflicting numbers... which can ba alarmist.

But surely, how can people expect to get a leg up in life if to be secure they have to spend 30 years paying off a home loan, even 40 years. The only option they have to is litterally land a well paying job (as it is, it would indicate that many have squandered their pay anyrate) or be good at business. For awhile there I was seriously considering moving overseas or interstate where my field would be of benefit and building equity would not be hard.

Being able to readily afford land is a real problem for Australians - as it probably is the only practical measure apart from saving - to hedge against risk. The previous generation - in my field for instance, were buying blocks outright in their 20's.. Readily available, affordable equity building - especially if you could do something with it. My Grandmother bought, for instance a block of land, a sandhill not far away - her father thought she was absolutely dotty. it's just 1/2 acre roughly... for 5 Pounds. 60 years later, its worth over a million...

The good thing about Australia, was if you worked hard, were shrewd, you could hedge and be very well off as the debt to equity ratio was damned low if you could use it. You can still do it of course, but not if your in an average job - as the study indicates (trying to find an actual copy). So average joe's real option is to buy an established business, because the saying is 5 for 5, in five years, only 1 business will survive.

It's certainly not all gloom of course, because people can take the lifestyle choice. You can live a well off lifestyle with only your job as your security and spending time being alive - theres plenty of sharks out there doing everything they can to sell you some stupid plot without a backyard for a dog & garden (sorry BF showing my CB routes here) 80k's from your place of work.

People might still buy houses as part of that dream (when I grew up it was a few acres, then it was an acre, then it was 1/4 acre, then it got into meters, and now in the city, they measure the "huge" space in the advertisents as over 700 sq feet..! ) as people realise that the hype might be true, and they will never be able to reach even one criterian in their ideal life. In some places, out there - as investments (read no FHOG) if they can get together the deposit ?(less reqd on an investment) Still a viable path for someone on 40K if they want to take it...

But seriously - some people would be well advised to see a financial planner, as soon as they leave high school - so they don't sit around hoping for a dream to happen, because, quite litterally, owning a home on 40k does not make sound financial sence in many situations unless the person is not all together there and is attached to the sentiment of keeping up with someone who has landed a better job. Better to realise that at 20 than at 30.- let alone later.

Of course im a bit of a pessimist...

your opinion?

Edit: Somehow I don't think housing prices will crash - I'd be tending to a long/slow decline if indeed it did happen - seller would have to be somwhat desperate, and there are various opions available to even the mortgagee from a bank that the owner would be likely to hedge against rather than accepting a lower price.

PS I have been talking with a few friends about doing NZ by Tredly for the past few years - if they did build it, I would go on it!