13 Sep Economic Rehab

There’s not much action to report in regard to economic renewal and activity at the moment. What steps is the government taking to stimulate the economy again?  Andrew’s observation that we need to put the economy into “rehab” highlights the need for strong economic policy to guide us through these uncertain times.

Please read on to examine this issue in further detail or click on the download button at the end of the article, to read later.

Engines of growth are stalling….. Need to enter economic rehab?

Last weeks’ release of GDP data for the second quarter showed steady though weak economic growth. Is the glass half-full or half-empty for the new government? The collective noun for a group of Economists is jokingly known as a “Gloom”. In this article I explain why we should be concerned for economic performance in the next 2 years, by taking a closer look at the latest data and by trying to identify where the future drivers of growth will come from. I will also set forward an argument that because of the limited policy options available, and the return to some policy mistakes of the past, we need to enter an economic policy “rehab” and re-focus our efforts on supporting businesses in the real economy.

A look at the data

As always let’s look at the new evidence available around economic growth. The following four graphs show the steadying annual growth in total GDP – seasonally adjusted (graph 1) and its weakening sub-components (Spending – Graph 2, Investment Graph 3 and Trade Graph 4). Although overall annual growth steadied at 2.6%, it was only the contribution from inventories, a weaker statistical discrepancy and higher mining related exports, which supported this still below-trend overall growth number. Spending and investment growth continued its downward growth path, a warning sign for the future. The engines of growth therefore continue to falter as we approach a large transition away from mining investment.

Current policy

The current policy being pursued in the transition from mining investment period is to lower interest rates to support asset prices and stimulate building work and other investment. There is an additional hope the dollar will weaken and improve export competitiveness. However there are risks that this policy will only result in further inflation of the housing bubble as investors’ fire up debt-fuelled property portfolios. It also won’t be enough to support growth in the near term as big CAPEX projects go off line. Other real economy sectors continue to be hampered by weak demand, high costs, lower profitability and poor availability and affordability of credit presently favouring housing loans. Current policy is failing and will soon be unmasked.

Need to enter Policy Rehab?

The new government will face tough problems as the engines of growth weaken further past the honeymoon period. How can Australia re-balance policy away from reliance on Resources and Housing-led growth, toward more productive sector led growth? The bad news is the macro policy options are now limited (monetary and fiscal) and have largely failed in any case (although a weaker dollar would help). Economists can be criticised for being too pessimistic, but looking at the data the growth engines are going out and the auto-pilot needs to be disengaged by somebody with a new economic plan for key sectors of the economy (see previous article). The longer these decisions are fudged then consumers and businesses in the real economy will continue to be squeezed. Time for Policy Rehab?

Andrew Stockman : Economist (BSc, M.Econ)