The Australian Economy, Stupid. September 2016

Terms of Trade
Terms of Trade over 15 Years (ABS/Comsec}

PREAMBLE

  • A Pleasing set of Numbers (Hockey – September 2014)
  • A Terrific set of Numbers  (Hockey – June 2015)
  • The Best Growth Rate since 2012 ( Morrison – September 2016)
  • Then why oh why are:–
  • Australian living standards falling?
  • Young Australians unable to afford to buy a home?
  • Interest rates at 1,5%, the lowest ever?
  •  Salvation lies in consistent positive Terms of Trade.

What is the proper message we should hear from Australian Government Treasurers? Below is a potted summary of the Australian financial situation from mid-2014 to mid-2016. It will be shown that the above adjectives tend to disguise the situation. This is a call  aux armes citoyens to drive up our Terms of Trade and  to ensure we are not bamboozled by misleading commentaries from  our ruling elite.

The catalyst for this offering is Treasurer Morrison’s embrace of Australia’s mid-2016 accounts. To place his enthusiasm into context, we start with Treasurer Hockey in mid-2014.

DISCUSSION

In September, 2014 Mr Hockey indicated the National Accounts were “a pleasing set of numbers” which confirmed a consolidating economic momentum. As Mr Hockey was speaking, the Reserve Bank Governor, Mr Stevens, was warning of a dangerous bubble in the housing markets. It was ingenuous of Mr Hockey to indicate the GDP figure had risen by 0.5% in the June quarter but he had omitted to indicate that the real GDP had fallen by 0.3% due to the unfavourable Terms of Trade. The Reserve Bank of Australia considers the real GDP is a more meaningful measure of economic health. Treasurer Hockey knew this well. Was this deliberate omission or a senior ministerial moment? (SMH, September 2014)

Now forward to June 2015. The National Accounts for the the quarter ending June 2015 indicated GDP rose by 0.1% with an annual growth of 2.3%. (ABS) Treasurer Hockey enthused “a terrific set of numbers”. He indicated the Australian economy was among the fastest growing in the world. What Mr Hockey did not mention was that this period constituted the fifth quarterly drop in the Terms of Trade which was squeezing company profits, taxes and wages and that real net disposable incomes was now less than that in the September quarter 2008. (GFC) Australian living standards were falling for the first time in fifty years – and this is not a short-term trend. People are now spendings savings to make ends meet. This reduces domestic demand which knocks on to fewer job opportunities. (Financial Review, 3 June 2016)

Concurrent with Treasurer Hockey’s  upbeat comments the Boston Consulting Group, Sydney, opined that Australia’s low interest rates (then 1.75%) and Government spending was producing a potential spiralling national debt burden. Compounding this fragile transition away from resources investment, the non-dwelling construction activity declined by 4.9%. What is happening in the economy is that national productivity is falling as growth moves away  from low labour profitable  mining to low paid  intensive labour in  tourism and hospitality. These are issues lurking behind the Treasurer’s enthusiasm. (Financial Review, 3 June  2015)

Forward again to September 2016. Treasurer Morrison has commented with gusto on the National Accounts for the June quarter. We are told there is no sign of a downturn in the economy which has grown by 3.3% – the best growth since 2012. There was also fulsome comment that the growth rate is a tribute to hard working Australians. No where, apparently, was there reference to a need to encourage exports and thus improve the Terms of Trade. Mr Morrison noted that the Terms of Trade for July showed a $285 m reduction on the June figure (ABS 5368.0) due to slightly increased exports and decreased imports which might indicate  less disposable income was available for overseas goods.

  • Exports.  June $25,706m. July $26,425m
  • Imports. June $28.957m. July $28,835m

What was not made clear by the Treasurer was that the 3.3% GDP growth was boosted by pre-election Government spending and, curiously,  on increased expenditure on hepatitis C drugs. (SMH, 7 September 2016) Currently brakes on the economy are weak household spending, weak wages growth and a decline in the national hours worked. Irrespective of encouraging statements by the Treasurer, the historic low interest rate, now 1.5%,  and low inflation rate of 1.0% (RBA band 2 – 3 %) is indicative of a sluggish economy.

 

CONCLUSION

The tentative conclusion, is that statements by recent Australian Treasurers cannot be accepted at face value. Their statements must be evaluated within the wider picture of the Australian financial situation.  The driver for the future is a positive Terms of Trade that, initially, balances the  budget from this jobs and growth  and other benefits will follow.

 

 

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