There’s a lot of doom and gloom and frowny faces around at the moment, but the Aussie economy is still the envy of the world, and these charts show just how much momentum there is behind us.
Joe Hockey is paving the way for a slash and burn budget, carefully managing expectations so that if a velociraptor comes storming out of the Treasury papers and starts eating journalists, no ones going to be surprised.
And why wouldn’t he? The first budget is the one to do it. You make a few enemies now, in your first budget, and then you buy them off again in the budget before the election, and everything’s sweet.
And democracy’s the winner on the day.
But in all the hoo-ha, let’s take a look at this narrative that the Australian economy is sinking like the Titanic and the only thing that can save us are an militia of velociraptors dressed as Treasury officials.
Not that I don’t think there’s room to give the public service and nip and tuck, but do you have to scare the be-jeezes out of people in the process?
First up, the Australian economy is still the envy the world. Still. What’s that? Like 10 years in a row?
If we were Americans we would have declared some sort of parade and handed out little Aussie flags to everyone.
But check this chart out here:
Indexed to 2007, it compares our GDP (left panel) and employment (right panel) to the US, the UK and Europe.
Yep. Aussie Aussie Aussie!
Not only has our economy outperformed the world, we’ve done it with style. We totally side-stepped the GFC, and our economy continued to grow through it all. Employment growth stalled a little, but never really lost ground.
You couldn’t have really asked for more than that.
Of course the big story in that marvellous, dummy, side-step, goose-step manoeuvre we pulled on the GFC was the mining boom.
The mining boom reshaped the Australian economy. This chart here gives you the basic idea. This is the make up of Aussie exports:
From around level-pegging with services, agricultural and manufacturing exports at the turn of the millennium, mining exports have exploded in recent years, and totally dominate trade.
But recently they’ve collapsed and we’re all going to die. I mean, no they haven’t. They’re still rising, and recently reached new records. Nothing to worry about here. The goose is still laying golden eggs.
That’s not to say the transitioning mining boom is going to present us with some challenges. But it’s not in exports and earning potential. It’s in investment. The phenomenal pace of mining investment has eased some-what in recent years, with those head-line mega-projects becoming thinner on the ground, and so we’re looking for the rest of the economy to pick up the slack…
So how are we doing on that front?
Well, actually not as bad as some people might tell you.
The retail sector has had a rough trot in the past 5 years, but has actually bounced back in the last six months. Retail sales are currently growing around 6% a year. Growth’s been stuck around 3% in recent years, and it’s good to see growth get back to more ‘normal levels’:
The construction sector, also one of the pillars of the Aussie economy, is also bouncing back strongly, as I reported last week. Higher prices are bringing developers and banks back into the game, and that’s good news for output and employment.
This chart here follows loans for new housing construction (in billions of dollars). It’s bounced up to the highest level in 10 years! What we’re looking at is the emergence of a construction boom.
At the same time, the manufacturing sector, despite some high-profile closures, is also doing surprisingly well. Activity has picked up in the last six months, and this graph here tracks loans to the manufacturing sector. They’re the highest they’ve been in two years!
That’s good news, because loans tend to go hand in hand with expansions in production and output.
I think a lot of people don’t realise how tied Australian manufacturing fortunes are to the rest of the world.
That’s what this chart here shows. Australian manufacturing business confidence moves very closely with The Global Conditions Index. We have a very open manufacturing sector.
This is good for trade, but does mean we can cop a beating when the Aussie dollar starts to soar. In fact, I reckon most of the recent pick up probably has to do with the depreciation in the Aussie we’ve seen over the past year.
And so the Aussie dollar remains one of the biggest challenges we face, and one of the key pivot points for the Aussie economy. This is unfortunate because there isn’t really much we can do about it.
But what it does do is put a lid on interest rates. If the RBA hikes rates, then AUD-denominated investments (like government bonds) start paying more, and foreigners start buying more Aussie dollars, pushing the price up.
The RBA’s got to keep a close eye on the interest rate differential, and pretty much all those countries in the first graph have zero or close to zero interest rates.
This keeps hefty downward pressure on rates.
Which in turn pumps more and more cash into the housing sector, further fuelling the construction boom…
… as well as retail spending and loans to the manufacturing industry.
So do what you need to do, Mr Hockey. I understand how politics works. Sometimes you need to scare the patient to get them to take their medicine.
But I’m not buying into this ‘economy in tatters’ story.