Australia’s economy continues to under perform

Contributed by Joe Montero

At the beginning of August, continuing the prognosis of recent times, the Reserve Bank of Australia forecast revised the expected growth in Australian economy downwards by 0.75 percent, using the standard GDP figures. According to this, official economic growth will continue at around 3 percent. This is misleading however. It hides the underlying problems and provides a somewhat false picture of what is going on.

The Reserve Bank joined the government in an upbeat pep talk, insisting that the economy is in a good position. If it was, the interest rate would not have been held down last month. Something else is going on here and we are not being told about it.

A good clue comes from the Australian Bureau of Statistics’ (ABS) production chain volume measure of GDP, which is more attune to the real economy, because it considers it from the viewpoint of the creation of goods and services. This puts the the increase in the last quarter down to 0.4 percent and the projected growth for the coming year at just 1.7 percent. The bottom line is that the Australian economy is not performing well and this is an ongoing trend.

For those in debt, the good news was that the interest rate is not going to be put up and there would remain at 1.5 percent, continuing the historically low rates that have held for 13 months straight. This is not because the Reserve Bank and government are being kind, but it is the outcome when there is an oversupply of money, relative to the economy’s performance.

There needs to be less spin and more an opening up and transparency in what we are told.

A significant part of the excess money is being soaked up in the real estate bubble. The issuing of government bonds is taking up a smaller part of the slack. Then there is some limited infrastructure building. Without these factors, the GDP measure would be considerably less.

The point is that much of this this activity is not being generated by and covered by growth in the real economy, nearly anywhere near as much as it is being funded by debt. This is not good news. Without generating sufficient new growth, debt cannot be paid off and it just increases. The debt level has now gone past $251 trillion in an economy of $354 trillion. Financial institutions have a vested interest in downplaying this. But whichever way you look at it, this is unsustainable in the absence of sufficient growth in the real economy to cover it.

A fall in the real estate market, a cut back in bonds and a scaling down of infrastructure building, without sufficient compensating measures, will be no help in an already sick economy. There would be even less activity and growth. In these circumstances, a fall in debt would lead to a devaluation of the currency as the supply of money in circulation increases and the the general price level goes up.

Signs are clearly showing that the real estate bubble is coming to an end. Whether it will do so with a bang or a whimper, it is impossible to tell yet. Whichever way it does arrive, it will cause considerable dislocation that will ripple through the economy.

The Australian government continues to put heavy reliance on funding its way through issuing bonds and taking advantage of big foreign investors, nervous about their exposure to the under performing currencies like the American Dollar, British Pound, Japanese Yen and Euro. To an extent this is legitimate. But if this is not tied up to growth in the real economy, all it does is increase the level of our national debt. It cannot keep on going indefinitely. In addition, this reliance increases exposure to the the effects of a less stable currency exchange regime and the fickleness of major foreign investors and global market.

Infrastructure growth is far too patchy and not based on a sufficient overall plan to transform the Australian economy out of a dead end and into sustainable growth. A good example of what is going wrong is the debacle over the costly National Broadband Network (NBN). It is third rate and not adequate for the needs of the future. Its contribution to future economic growth has been limited. More likely than not, Australia’s infrastructure growth is likely to dip once the NBN has been completed, unless the government’s economic policy undergoes a radical shift.

On the back of the existing weakness of the Australian economy, the Australian dollar’s relationships with other currencies is becoming more unstable; up one minute, down the next. A higher exchange rate is contributing to a fall in earnings from Australian exports and a rise in imports, within the context of a global economy that is itself performing sluggishly.

Speaking of the global context. The pressures towards trade wars over China, Russia and north Korea are not helping a situation already fraught with internal problems. The Australian government’s partisan pro-US position on everything has the potential to undermine Australia’s relationship with our most important trading partner.

Indicators suggest that Australia is doing even worse than many other developed countries at present and if this keeps up, it spells trouble ahead.

The Australian Bureau of Statistics’ (ABS), pointed out that in June company operating profits reduced by o.4 percent for the quarter, continuing a longer term decline over the financial year. This is expected to continue, as are sales measured at constant prices are expected to remain stagnant, as is wages growth.

Finally, Australia’s export earnings are expected to continue to be static.

In the light of these pressures, current government economic policy, continuing to be based on declining government expenditure is wrong. In the first place, a significant increase in infrastructure building that is suitable to enabling Australia’s economy to move forward in the best way, would be much better. For instance, a shift from reliance on mineral exports, towards alternative energy and new emerging advanced technology based industries could be made. The real estate bubble could be countered with new public housing construction, together with together with the removal of the effective government subsidies that help to keep the cost of housing artificially high.

Taking these measures presupposes that there is a re-direction of where money is spent, instead of allowing an increase in the money supply. This would cause much less disruption and negative impact on the Australian population, as it provides the best conditions for improving the collective wealth. Tied to this is a re-think of the government’s spending priorities, ensuring that all contribute fairly to the collective need and bringing in a much more progressive taxation system.

The road we are on now is not working and this means that a major change is necessary.





1 Comment on "Australia’s economy continues to under perform"

  1. Couldn’t agree more. The old JH system is being reintroduced & things can only get worse. Nothing will improve until we get rid of these rogues!

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