Housing a risk, but Australia won’t have a recession for years


Public demand is on the rise

By Alan Kohler  The Australian  September 17, 2016

It will be almost impossible for Australia to have a recession for at least five years, probably 10; it means the run of 25 recession-free years will extend to at least 30, possibly 40.

Australia’s colossal mining investment boom, which involved two years of $24 billion per quarter of capital expenditure for resources exports, is well and truly over, but it will definitely result in net exports contributing at least 2 percentage points per annum to real GDP growth for 15-20 years.

So for Australia to have a recession, the domestic economy would need to shrink by more than that much. It’s simply not going to happen.

This leads to a couple of conclusions: first, that the normal process of governments being thrown out after recessions will continue to not work, and second, we need a different way of measuring the economy.

Over 25 years without “recession” headlines, governments have either died of old age (Howard, 2007) or self-destructed (Labor in 2013 and the Coalition, almost, in 2016). In 1972, 1983 and 1996, (and ­almost in 1961) recessions did the work.

If the Coalition doesn’t find a way to destroy itself, there’s no reason it should also die of old age in 10 years time, or longer.

As for economic measurement, both real GDP and the unemployment rate are now hopelessly flawed — not that they aren’t accurate, they just measure the wrong things.

We saw this week that unemployment fell from 5.7 per cent to 5.6 per cent — half the peak level of the last recession — while under­employment rose to a record high of 8.7 per cent. Total hours worked continued to fall at a similar rate to the GFC and the 1991 recession.

The unemployment rate will probably keep falling, if only as a result of falling participation, which will give a misleading picture of the labour market.

Meanwhile, the huge decline in our terms of trade has already resulted in four years of per capita income recession while real GDP has continued to grow by 2-3 per cent. That has probably ended now — commodity prices are rising — but it could happen again if China’s economy kept slowing beyond the target of 6.5 per cent, or there was a global recession.

But even if LNG, iron ore and coal spot prices fall again, more than 90 per cent of Australia’s commodity exports are contracted, so net exports will keep churning out 2 per cent of real GDP no matter what — so no official ­recession.

The only risk to the domestic economy appears to be housing: apartment construction won’t continue at the current rate, and in fact there seems certain to be a massive oversupply in 18 months time.

The housing investment boom might have replaced the mining investment boom, but it’s nothing like it: that’s because the results of it — apartments — are not productive assets like LNG plants, mines and ports.

There’s something of an increase in demand for furniture and appliances, but that’s actually more related to population growth than the simple existence of more dwellings.

In theory, two bad things could happen when the housing construction boom ends: first, simply the end of the activity itself leading to lower real GDP offsetting net exports; and second, a collapse in prices due to oversupply, resulting in a reverse wealth effect and a drop in household consumption.

But it isn’t necessarily the case that apartment construction will suddenly cease or that prices will collapse, largely because the flow of money from China has probably only just begun.

The collapse of the Shanghai stockmarket bubble last year led directly, and immediately, to a property bubble in China’s tier-one cities, especially Shenzhen, where prices have increased by an ­amazing two-thirds in 12 months.

Bubbles like this always deflate, destructively if there’s leverage as well, as there usually is, but the end of China’s property boom won’t necessarily have a negative flow-on effect on Australia. In fact, it could do the opposite and result in something similar to what happened in June last year — money flowing out of China’s property market and into ours.

That’s not to suggest we’re in for some king of endless housing boom in Australia, just that it won’t necessarily come to a screeching halt — thanks to Chinese demand.

China’s growing wealth is also resulting in other booms as well: vitamins and supplements (Blackmores and Suisse), baby formula (Bellamy’s), wine (Treasury Wine Estates), tourism and education.

These things alone will ensure that the domestic economy and other export categories add to the ongoing 2 percentage point (or so) contribution to real GDP from resource exports, and then on top of that is government spending.

The federal government is not spending, and in fact is trying to cut back, but the states — especially NSW and Victoria — are starting to spend big on infrastructure. The two big eastern states are rolling in cash from the property boom in the way that WA and Queensland were during the mining boom.

As a result public demand is now growing at 4 per cent per annum.

And if Malcolm Turnbull finds a way to fulfil Tony Abbott’s ambition of being “the infrastructure PM”, by borrowing off-budget at the current super-low interest rates, there’s no reason why that sort of growth in public infrastructure spending can’t be sustained.

And with all the apartments being built in Sydney and Melbourne, the state governments still have a lot of work to do in servicing them. And if that sort of fiscal policy actually does come to the rescue of ineffective monetary ­policy, maybe the economy will not only keep growing, it will feel like it as well.

Original article here

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