US Federal Reserve to hear just how lucky we are in Oz
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Jackson Hole in the Tetons in the American state of Wyoming, is said to be beautiful at this time year. Mountain air, blue skies, the open spaces. Lots of trees. This weekend it is likely to be gloomy as many of the world’s leading central bankers gather for the annual conference run by the US Federal Reserve. Gloom will be the order of the day because the meeting will be looking at the global outlook, which has, well, got gloomier in the past two weeks with the US slumping towards what could be another round of negative growth, the huge Japanese economy on the edge of a fall into the red, while gripped by deflation; China slowing and apart from Germany, Europe mixed as debt concerns start to resurface after taking a summer break. The conference will get an early-morning heart starter at 8.30, Washington time, with the release of the second second-quarter growth estimate. It’s unlikely to be good news with a big cut in the figures expected. That will add to the growing sense of helplessness than some are seeing among central bankers and other authorities as they try to steady a recovery that has peaked in many countries and is now fading, too rapidly for the comfort of some. And yet there will be one attendee with a different story. Ric Battellino is deputy governor of the Reserve Bank of Australia. His story is of growth, inflation, job creation, cautious consumers, low debt. He will be going fresh from making a major speech in Brisbane on election eve, which detailed Australia’s unprecedented 20 years of growth and our current economic outlook. It was a conservative speech, but nevertheless confident about Australia’s outlook, so long as we keep a close eye on inflation. Just that one word will be enough to spark interest among other central bankers now battling to deal with intensifying disinflation and possible deflation in their economies (apart from Japan, which still can’t come to grips with deflation, despite it dominating that economy for much of the past two decades). Battellino will, of course, be attending as the data flow ahead of the release of our second quarter GDP numbers next Wednesday continues to point towards a solid level of growth in the three months to June. While the slowing in the contribution from government spending will be a big negative, the contributions from retail sales is already pegged at a stronger-than-expected level, construction figures out yesterday surprised on the upside and the trade account has moved heavily into surplus as our terms of trade soar off the back of high prices for iron ore and coal. But capital spending remains weaker than expected, although expectations continue to rise, according to Australian Bureau of Statistics figures out today. That will temper hopes for a rise of 1% or more in quarter-on-quarter growth. Unlike many other countries, especially Japan and the US, Australian unemployment is falling, jobs are being created and tax revenues are rising. Despite the absurdist claims of the Federal Opposition, debt and the deficit are under control and falling, thanks to higher tax revenues. Certainly the news from the US in the past couple of weeks will mean that Friday’s double hit of the second estimate for second quarter GDP growth and a major speech by Fed chairman Ben Bernanke to open the Jackson Hole conference, means that Australia’s story will be noticed, envied, but ignored because the fears are now of a looming slump. The first estimate of US second quarter growth was 2.4%, US economists now have their new estimates about 1.2%-1.5% (these are annual figures), or about 0.3%-0.4% quarter on quarter. There’s another release of weekly unemployment benefit figures tonight. A repeat of last week’s shock when the weekly figure climbed to a nine-month high of about 500,000, would see those estimates come down again from analysts made even nervier by terrible housing sales figures this week. The US new housing figures were rotten, down to a record low of an annual rate of just 276,000, with June restated to just 315,000. The July rate is about double Australia’s current rate of new home building, and yet the US economy is about 14 times larger than Australia’s. But the current rate in the US, along with the rotten slump in sales of existing (pre-loved) homes could intuitively be the bottom the market is searching for. It’s hard to see more months like the past three for the US housing sector, which is now firmly entrenched in a deep depression and won’t escape for some time. In fact, discounting for the impact of the home tax credit (which finally ended in April), it’s hard to escape the conclusion that the US new and existing home sectors have been in a depression now for at least three, maybe four years. If new home starts, permits and sales, plus existing home sales continue at about current levels for the next few months, home prices will start falling again, but we won’t see the 20%-30% drops we saw in some regions from 2006 to 2009 (around Nevada, Florida and California). The falls could be up to 10% and will help establish a bottom for the sector. But don’t expect to see that happen until well into 2011. US manufacturing is slowing, as are durable goods orders (for products that last longer than three years) which is an important indicator of business investment; inventories are starting to edge higher, retail sales are stuttering, in the week ending August 11, US banks saved another $US35 billion to take their cash pile to $US1.3 trillion, and bought another $US35 billion of US government debt (It’s safer to lend to Uncle Sam than to main street businesses or consumers). Credit card balances are falling, and yet rates are at nine-year highs; US home mortgage rates are at record lows, but new business is weak and most of the loans are refinancings as existing home owners cut their interest costs to try and make up for loss of income from falling interest payments, dividends, share prices and cuts in salaries and hours in many cases. Or a loss of jobs. The US labour force is now just over 129 million people, what it was a decade ago. More than 7 million people have lost their jobs in the past three years and in the past 10 years, America’s adult population has grown by 6 million, meaning the employment picture is worse than the 9.5% official rate. In fact, including the million people who dropped out of the US labour market from May through July, the unemployment rate would 10.4%, according to economists. In the third quarter reports from major US retailers, every comment was about how “challenging” conditions were, how muted sales were, with discounting intensifying, cost cuts being promised to maintain earnings and consumer very reluctant to spend. The mighty Wal-Mart, which rode through the recession in 2007, 2008 and part of 2009 as US consumers traded down to cheaper and cheaper goods, has seen negative same-store sales in its US shops now for five quarters. Pizza Hut is slashing the price of its products to try and maintain business, Kindle book readers are now just over $US120 each in New York, less than half the list price. There are numerous stories of other companies doing the same thing, cutting prices to try and hold business, let alone increase sales. All this will be discussed at Jackson Hole, but not by Ric Battellino, he’s got the traditional central banker’s worry central in his mind, inflation. Australia is a very, very lucky country at the moment. Let’s hope the fruit loops and others in Canberra understand that. |
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14 Comments
Let’s hope more than just the less numerate of Canberra fruit loops understand that we are where we are largely because of luck (and of course which good things done by previous governments have helped us ride safely on our luck). If so, it will be easier for the not so fruity loops to do some sensible things.
Let’s not spend up just because we can. We will be able to, very probably, because our resources are going to be in demand for a long time to come. But that gives us the opportunity to build firm foundations for dealing with most possible futures. More high quality science and plenty of well diversified long term investments from surpluses in the Norwegian manner would be a good uncomplicated start.
Luck had nothing to do with it. With out the governments stimulus package we would have had to close down our business. Kevin Rudd and Wayne Swan saved the building industry in NSW. NSW would have had unemployment over 10%.
“Leading Keynesian Econometric Buffoons Face Fact That They’re Idiots & Have Helped Ruin Everything. “
Ah Julius.
With your understanding of economics you must be working somewhere as a high level economist. After all, you seem to know so much more about the effects of the stimulus and impact of the GFC than the majority of economists around the world.
I love how every arm-chair economist thinks they know more about economics than the people who, you know, actually studied and dedicated their lives to understanding economics as best they can. It couldn’t possibly be that people are basing their economic views on whatever political party they support. Nah, that would just be silly. LOL
@ DAMO
“Luck had nothing to do with it” is almost always a vast overstatement which suggests a degree of blindness that precedes a fall. I hope you don’t end up with nothing but the age pension…
You are also shooting a straw man. The point is not whether “the [sic]…. stimulus package” was a good idea or productive of more good than harm, it was about the degree which luck is responsible for our being so much better off than almost every other country. Even the reasonably prudent fiscal policy that Howard allowed Costello to run (which was much more important that any stimulus package in positioning Australia so happily) depended on the luck of growing China trade.
As to “the” stimulus package, it seems you are a defender of the second, massive, and badly administered package which wasted a lot of money (not all obviously) and was not designed to allow it to be limited when it became clear that enough had been done. That’s another issue but I would have thought that the deficiencies of the government’s response to the GFC after the initial “go early, go hard, go households” package would make you feel lucky that we got away with being so incompetent so well.
@SCOTTYEA
You are quoting whom or what? “Keynesian Econometric [Buffoons - or anything else]” is a bit puzzling. Keynes certainly wasn’t an econometrician and I would have thought the leading users of econometric models were the “Freshwater” neo-classicals of Chicago rather than the “Saltwater” Keynesians of Harvard…… Please explain.
@ D Smith
Where do you find ANY comment in my original note that suggests that I was commenting on the wisdom or efficacy of any of the stimulus packages anywhere? Don’t you read what other people write, or having read do you merely follow the practice of those who eschew intellectual rigour or self-knowledge and filter it through your own vague preconceptions and predilections?
Despite my doubts, or rather, in truth because of them, I invite you to enlarge on the knowledge which leads you to imply knowledge of what “the majority of economists around the world” say about stimuli and the impact of the GFC.
Perhaps you would also like to enlarge on the wisdom of those who “have studied and dedicated their lives to understanding economics” as you seem to know enough to contrast that with the views of “armchair economist[s]” (who, I can assure you, include the many academics and professionals who find an armchair a good place for study).
Isn’t there a bit of a problem about some differences between, say, the “Austrians”, the Chicago school and the East Coast Keynesians and neo-Keynesians to mention only a few of the contending systematic sources of ideas? Do you ever follow Marin Wolf’s blogs with their distinguished contributors in the FT? Would you still care to make a contrast between your[mis]understanding of my views and those of what you seem to think is a unified economics profession?
No, I didn’t think so. But perhaps your future absence from blogs might indicate a taste for the old-fashioned virtues of humility, thoroughness, and not wasting people’s time with ill thought out garbage.
The luck we had was in having three relatively competent Governments in a row, a feat rare in the world. The Hawke-Keating deregulation and floating, the Howard era savings and the Rudd Government stimulus and other measures all contributed to Australia avoiding the bullet. If it wasnt for the preceeding Governments actions the later Government wouldnt have been in a position to act.
I dont think the stimulus failed in its primary aims of maintaining employment and pump-priming the economy, even if the secondary aims of insulating houses and building school buildings were not as succesful as they could have been. Mind you the private primary school my own kids go to got a brilliant building (at a reasonable cost) which the school would not otherwise have been able to build for quite some time (if ever). Which is a lesson that none of the last three governments have been completely competent, just competent at the most important bit of their job.
But getting back on topic, I know people in the US, good competent professional people, that are walking away from their homes as the price collapses. There are absolute mansions in some states going for a quarter million. People cant build houses that cheap, hence none are getting built. Loans going for a fixed for 30 years 3%pa.
Finally, long may the resources boom last, and this time we should put more of the revenue stream into lasting benefits.
Julius,
I refer you to your own words: “Let’s hope more than just the less numerate of Canberra fruit loops understand that we are where we are largely because of luck (and of course which good things done by previous governments have helped us ride safely on our luck). If so, it will be easier for the not so fruity loops to do some sensible things. “
You talk about good luck and previous government activity. You don’t make any specific comment on the stimulus. But you do say “Let’s not spend up just because we can.”. I may be wrong, but that sounds like a bit of a swing at the stimulus spending.
I refer you to the letter from more than 50 leading economics professors and lecturers commending Labor for their handling of the GFC. (i’ll post the link to the letter in another comment because of the moderation of posts with links)
A quote from the letter:
“We the undersigned economists are convinced by the evidence that the coordinated policies of the
Australian Labor Government have prevented the Australian economy from a deep recession and
prevented a massive increase in unemployment. Unlike most OECD economies we have come out of the
Global Financial Crisis and the subsequent world recession with only one quarter of negative GDP
growth and a smaller increase in unemployment.”
There’s no mention of luck in that letter. So, do you think you’re smarter than these leading economic professors and lecturers? Because your claims that luck and previous government activity are the reasons we fared so well throughout the GFC are at odds with the claims of the signatories to that letter.
I’m not an economist, I don’t pretend to be. But I’m way more likely to believe an open letter signed by 50 economic professors and lecturers than a comment on a blog or a claim by a politician.
Link to the leter from the economic professors and lecturers for reference.
http://images.brisbanetimes.com.au/file/2010/08/16/1781211/Labor%27s%20Stimulus%20Package%2C%202010.pdf?rand=1281938198564
Thank you Julius, I am most certainly a Defender of the second Stimulus package.
My only criticism is the premature ending of the insulation scheme, leaving the industry with warehouses over flowing. They should have just prosecuted the dodgy installers. A quick check of the statics shows there was no increase it work place deaths or fire during the scheme, just media hype.
As for the BER, I know our local Primary has kicked up a fuss about getting a new hall when the Library needs work, but the Library has needed work for over 10 years. With or with out the BER the Library would still need work, due to years of poor education funding. Its not right to blame the current government for previous governments lack of infrastructure spending. Also Schools can and do rent out halls to community groups as good source of income.
I also would have liked to see some funding for the Brisbane to Sydney motorway that Howard promised 15 years ago.
Think of how much less debt we would be in if we weren’t paying for 2 ridicules wars in Iraq and Afghanistan. Over 1 billion a year.
@ DAMO
Well perhaps we differ on how much and what aspects of the second stimulus package we would defend. Against neo-classicals I have pointed out that the rhetoric of the economists advising the State Premiers in January 1931 to the effect that you can’t create profitable business by government subsidy etc. is literally untrue, mere rhetoric, however well intentioned and sound was the desire to create conditions for private business investment. So I would say that the insulation package was defensible even though I thought and said there were a number of better ways the government could have gone about implementing stimuli. Still it is a prime example of the incompetence which is to be expected when large organisations, particularly governments, have to do something unfamiliar in a hurry - and that’s without adding the doubts that experience suggest about the efficiency or any complex projects handled by politicians and bureaucrats. Indeed, you would appear to agree with me that war is the great socialist activity and no advertisement for socialism or government.
However, your prejudices about the Afghanistan and Iraq wars seems to have got in the way of your numeracy. Over 1 billion a year (most of it paid in years when we were in budget surplus) is actually not much of a contribution to the current and prospective debt. Cp. a $42 billion stimulus package and the beginnings of a $43 billion NBN project begun without a cost-benefit analysis.
FWIW my take on the wars is that we had to be in them probably, though the Iraq war was the height of US folly and hubris (with Tony Blair being a somewhat guilty accessory and John Howard fortunately having no influence on the decision to go to war by the US since he seems to have been a misguided enthusiast). In fact, at the expense of merely holding our place as a reliable US ally rather than getting any real credit, we got out of Iraq almost scot free.
As for Afghanistan we got into it with NATO support and a general view that Al Qaeda had to be countered and no country allowed to be a safe haven for it. Hard to criticise Australia’s participation given the huge advantages to our defence capabilities that we get out of the US association. It does look now as though it might have been better for the US just to say to the Taliban government “give up Osama bin Laden or we will bomb the sh1t ou of you day and night until you do”. Even now getting out with a warning that bombs will be the answer to any backsliding plus a campaign to destroy every opium poppy crop and heroin factory from the air might be the way to go. But. to get back to the debt, it wouldn ‘t make much difference to Australia’s debt.
As Australia’s debt isn’t such a big deal anyway given the good fortune we can be sure of enjoying for a few years in the China trade, provided we don’t blow it. The idea of Ricardian Equivalence leading to private investors holding back because of the taxes they are going to have to pay in future to pay off the government debt is almost fanciful. What about the concerns which taxpaying (including GST as well as income tax) consumers might have leading them to double their savings so they can pay the future tax to repay debt instead of buying a new washing machine now?
@D Smith
What a desperate effort to justify the contents of your own mind by a far-fetched attempt to construe me as making ANY comment on the stimulus.
And what irrlevance to quote a 50 mostly unknown economists (out of the tens of thousands in the world, including thousands of much greater distinction) on a subject I had just denied commenting on.
What is more the signatories of the letter would undoubtedly agree for the most part that Australia’s happy economic position in the world (and not just its unemployment level in 2009-2010) is a function of what governments, and, as Tony of the Bay says from his yacht, not just one government, have been able to do because of the huge demand for our resources - as well as the more direct effects of private investment and consumption also made affordable by a healthy export sector. (Not that it translates directly and simply into cash in people’s accounts and pockets but it does support the borrowing that, together with well judged banking regulation and prudent banks, fuels Australians’ expenditure and our GDP).
Sad really that selfishness racism and greed got to the QLD voters .Just shows the majority up ther dont know when they are on a good thing.
I would like to see how Abbott and his ragtag mob of ex Howard hacks as Ministers would have handled a crisis of such dimentions.
@ GO FOR IT!
Do you really think a Coalition government’s response to the GFC would have been materially different? Even if Costello had still been Treasurer (or PM) Treasury’s “go early, go hard, go households” would have been the sort of advice they would have relied on.
If you believe otherwise you probably believe that Australia wouldn’t have joined the “coalition of the willing” in Iraq if Beazley or Crean had been PM.
Except when we choose to bully small Pacific countries Australian governments are often at the mercy of events and circumstances.
But, a question: if you think “selfishness” and “greed” motivated QLD voters you presumably think they acted rationally in their own (greedy and material) interests. But you also think they got some element of their reasoning wrong, maybe a premise rather than the logic or theory. Is that right?