Rudd's Australia: Australian economy tanks while Rudd spends,spends, spends

The world is noticing Comrade Rudd's incompetence.

The Australian economy tanks while government debt and spending zooms

Gerard Jackson
BrookesNews.Com
Monday 31 May 2009

If Obama and his lefty mates had half the brains they pathetically think they have they would be keeping a close eye on the UK and Australia. Obama's 'economic policy' of spend, borrow and print the stuff — and keep on doing it — was also the policy of the British Labour Government. Thanks to that economic stupidity Britain is now on the brink of financial ruin and the economy is expected to contract this year by something like 4 per cent. The Australian economy is also continuing to contract despite Prime Minister Rudd's outrageous spending binge that has sent the country deep into the red for years to come.

The problem — as always — is one of lousy economics. While our economic punditry focus on consumer spending and fiscal policy they have completely overlooked the monetary situation. All the inflation indicators have been slowing since last September while M1 has been basically flat since May 2009.

Moreover, the decline in the Reserve's assets has accelerated. The latest monetary figures (they are always about two months behind) show that from February to March M1 actually contracted. In short, monetary policy is very tight.

When monetary policy tightens this should result in a slowdown in production, falling investment, rising in unemployment and a contraction in import volumes. (Westpac calculates that import volumes dropped by about 14 per cent over the Q4 and Q1). The latest figures from the Australian Bureau of

Statistics show that spending on equipment fell by 10.8 per cent in the March quarter. This is the biggest drop since this survey started in 1987. To get a better idea of how bad the situation is we need to look at manufacturing figures. The May Australian Industry Group report for April revealed that manufacturing had been contracting for eleven straight months. Australia is clearly in recession and has been for sometime.

Regardless of what the economic commentariat believes, manufacturing is a key indicator — not consumer spending. Focusing on the latter leads to confusion. Rudd's $8.4 billion cash handout represented about 3 per cent of GDP. Not surprisingly retail sails jumped by 1 per cent in the first quarter. We could get a repeat performance when most of Rudd's additional $12.7 billion injection is released in the second quarter.

As I have stressed many times before, consumer spending is only about one-third of total spending. Failure to recognise this fact comes from the fallacy that to include spending between firms in the national accounts would be double-accounting. (Businessmen are genuinely surprised when I tell them this).

Therefore it is not consumer spending but total business spending that should be monitored. Once this is realised it becomes obvious that the Australian economy went into recession last year and is still tanking. There is no way that running down the surplus and increasing government debt could have stopped this process. And there is certainly no way these policies can reverse the economy's direction. Given the Reserve's monetary stand fiscal policy in the form of greater government spending is powerless.

Treasury and Reserve officials are at a loss to explain the situation, something that Ric Battelino, the deputy governor of the Reserve Bank, made clear when he asserted that the principal reason for the difference between the sickly state of business and the current state of the housing market is the significant difference in borrowing costs, with the variable mortgage averaging 5.16 per cent while — according to Alan Kohler of the Business Specator — "the current borrowing rate for non-financial companies is 7.29 per cent".

However, since similar differences in borrowing rates exist in the US and Europe the Treasury can scarcely assert with a straight face that Australia occupies a unique position in this respect. The difference is easily explained. Firstly, as already noted, recession strikes at manufacturing first* and hence its effects will be first felt in business spending and not in consumption. In fact, consumption can continue to rise even as a recession deepens. This happened during the recession that Bush inherited. This means that any differences between borrowing rates for business and borrowing rates for housing are irrelevant.

Secondly, the government has used subsidies and low interest rates to maintain the level of Australian house prices regardless of business conditions. It's true that the US has done likewise but unlike America's utterly reckless Democrats neither the Labor Party nor the Liberal Party bullied lending institutions into giving mortgages to people who were patently unable to afford them.

Furthermore, several things need to be noted about housing. There is no housing market as such. What we have are a very large number of housing markets.

Houses in Endeavour Hills are not the same as houses in Toorak. Even within suburbs one can find a number of housing markets. Finally, it should be obvious that one cannot compare one country's 'market for housing' with that of another. Supply and demand conditions will always differ.

Mr Battelino is self-evidently clutching at straws.

*Housing too can be indicator because of its sensitivity to changes in interest rates. However, this sensitivity can evidently be blunted where mortgage rates are kept low.

Gerard Jackson is Brookesnews' economics editor