George Soros argues that “reflexivity” is to blame for the financial crisis — the tendency for imperfect, distorted perceptions of the market to affect market fundamentals, generating self-perpetuating bubbles, or even long-term super-bubbles that contradict traditional assumptions of market equilibrium.
However right or wrong Soros’s pet theory is, it’s a more than adequate description of the danger the whole Australian economy currently teeters on the brink of.
Ken Henry last week referred to the possibility of our talking ourselves into negative growth and you wonder how easy it will be to avoid that fate. Bad economic news gets front page treatment every other day, while good news — whether Treasury forecasts or ABS job figures — is publicly disputed.
You may or may not believe this has anything to do with a media desperate to sell news, and a bi-polar political process that encourages confrontation and dispute.
There are other, complicating factors. It’s an intangible thing, the real economy, because it’s a composite of millions of individual decisions a day. An accurate picture is pointillist, and even then misleads because of the enormous variations across the Australian economy. Not merely by states and regions but by industry, by trade orientation, by market.
Understanding what’s happening in the real economy is therefore immensely difficult at the best of times, but even harder during a slowdown. What was a two-speed economy during the minerals boom is in the process of becoming a multi-speed economy.
Different sectors will, necessarily, decelerate at different rates. Some will merely grow less quickly, although if you believe most China commentators, that’s apparently as big a disaster as actually shrinking. Some will barely be affected. Expenditure on essentials such as health, fuel and basic groceries won’t slow significantly. Others, sectors that depend heavily on discretionary income — like restaurants — collapse rapidly.
There’s also the complicating factor of the impact of an extended boom. Demand for skilled labour has vastly exceeded supply for several years. Employers have dealt with it by importing workers, paying more, and wringing their hands. In some sectors there remains considerable pent-up demand for labor. Unemployment among males in Western Australia in October was 1.7%, which is about as close to full employment as we’ll see in our lifetimes. Any pent-up demand will ebb as revenue falls and more lay-offs occur, but commentators are also talking about employers being loathe to let valued employees go, having worked hard to get them in the first place.
The first shift in employment will therefore likely be greater casualisation and more part-time work, rather than a sudden surge in joblessness. The car industry’s preferred method of handling falls in demand — simply shutting the factory down for a while — may become more widespread. Employment data from the ABS for the last three months shows male full-time employment holding up but female full-time employment declining in favour of growth in part-time work.
We’re also still notionally stuck with an inflation hangover from the boom, although the gutting of demand might put paid to that quicker than the Reserve Bank, even on its revised forecasts, expects.
And then there are trade-exposed industries that will benefit from the fall in the Australian dollar. This is the upside of the slowing of the commodities boom — a return to a more export-friendly dollar. Exporters will also find they don’t have to fight tooth and nail for employees if they want to expand.
This should also, by the way, put paid to simplistic concepts of “carbon leakage” under an ETS that is established before our major trading partners. The movement of the Australian dollar in recent months would dwarf the impacts of a carbon price for trade-exposed industries.
On the downside, there’s NSW. Australia’s least-competent government has presided over the double-whammy of having the second highest unemployment rate — 5.2% — and the second-lowest participation rate. Only South Australia has a marginally higher unemployment rate — NSW has a higher male unemployment rate — and only Tasmania has a lower participation rate. There’s plenty of substance to concerns that NSW could seriously impede attempts to avoid a slowdown. It’s had the brakes on for years already.
In short, the “real economy” is an average of a group of increasingly disparate sectors and regions. The danger isn’t merely that, in Ken Henry’s words, we talk ourselves into a recession, but that we ignore the reality of a complex mixture of positive and negative factors affecting how many Australians have jobs and what sort of jobs they have.
Tomorrow: A closer look at the labour market and retail sales.