Recessions are always a surprise, by definition. If the boffins could predict recessions then they would avoid them like they avoid car accidents.
Yesterday’s slump in the Westpac-Melbourne Institute Consumer Sentiment index to levels only seen during recession was that sort of surprise. Consumer confidence has collapsed in the past few months and is now 30% below a year ago.
Lending has also collapsed, for both housing and businesses. The only type of lending that has increased is for car loans, just as the price of driving the things goes through the sunroof. Not good.
Some parts of Australia are now heading for recession but others continue to boom; never before has there been such a difference between the economic stories in different parts of Australia. This gap is only likely to widen.
The economic challenge for the Rudd Government and the bureaucrats around it is no longer a national one, about making decisions that affect the whole country based on national statistics.
The national economic challenge is rapidly turning to one of redistribution – not the balancing of aggregate Australian employment and prices based on national ABS statistics.
The suburbs of Sydney and Melbourne are likely to experience enormous distress in 2009, as they watch Perth and Brisbane continue to boom because of iron ore and energy sales to China.
Yes, they will migrate to those places looking for work in increasing numbers, but that won’t be enough. The authorities need to focus on this challenge now.
There has been plenty of half-academic talk over the past decade about Australia’s two-speed economy, but the issue has never been truly urgent because the parts of the country in low gear were still going along OK – or at least seemed to be.
And as recently as a few weeks ago, policymakers and economists relaxed when the March quarter national accounts showed that national GDP grew by 0.6% in the quarter.
Predictions were even issued of further rate increases this year, and the futures market began pricing in the prospect of two further rate hikes.
This has now been exposed as a mirage. Eighty per cent of that March quarter GDP number (0.5 percentage points) was “statistical discrepancy”, which simply is the statistical difference between expenditure based and income GDP. That is, the numbers don’t line up; GDP is based on a discrepancy, not actual production.
It will almost certainly be revised down, probably to nearly zero. Yesterday’s consumer confidence release is telling us that the June quarter GDP might well be zero.
If national GDP growth is flat and the resource states are booming, then parts of the country are in recession.
It means east coast manufacturing and retail businesses are in serious trouble. The banking and finance sector is also likely to fall into recession as lending falls, although this will continue to be offset by the flows from statutory superannuation.
But it means that massive shifts in the underlying economic character of Australia that have been masked by the 15 year banking and finance boom in Sydney and Melbourne that has been based largely on debt, will now be exposed.
A fundamental decline in urban prosperity, especially on the south east coast, has been hidden by the growth in debt and the enforced saving of superannuation.
Rising home equity and a sharemarket boom that has increased superannuation balances has made people feel wealthy and they have happily financed high levels of expenditure with debt.
The housing and sharemarkets booms are now over, probably for quite a while. Incomes are being crimped by higher interest rates and food and petrol prices, and households are struggling with a big debt hangover.
As Stephen Koukoulas points out in this morning’s Business Spectator, household debt is now 165% of household income, compared to 50% before the 1990 recession.
The national debt to GDP ratio is 165%, double what it was in 1990 and compares with the level of 25% that pertained all the way through the 1950s and 1960s.
This borrowing has not only supported the boom in banking and finance profits, but also retail sales, manufacturing, transport and hospitality.
The effect of debt is to “pull forward” future expenditure. The result, inevitably, is less expenditure in future and heightened sensitivity to economic shocks.
The balancing of this sensitivity in some parts of the country with the resources boom in others presents Australia’s policymakers with the greatest challenge they have ever faced.
This story first appeared in The Eureka Report
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