Australia and its coffee-powered economy

Below is one of many current tales of doom about the Australian economy.  I don't buy it.  The symptom of doom that I mostly see is the record number of empty shops in shopping centres.  They certainly tell of financial pain for the people who once ran the businesses there.  But is that bad for the economy as a whole?

The usual explanation is that more people are buying online and thus fatally shaving the margins of physical retailers. But whether that is the cause or not, surely it tells of increased efficiency in the retailing sector.  We may be down from 100,000 coffee shops to 80,000 but no-one is going short of coffee.  The same demand is being served by fewer people using less real estate.  A situation that looks bad may in fact be good.

And our new government is very much pro-business so that almost certainly will cause an uptick in the new ventures that the writer below correctly says we need

The writer below is perfectly correct in saying our government sector is too big and our real estate prices are too high but those are chronic problems, nothing new.  We have lived with them for a long time now without too much harm to our living standards so I think we will continue to do so.

While visiting the US recently, I was pressed on what Australia excelled at. My answer: coffee. After suffering with Starbucks for months, I’d become keenly aware of the superior quality of our flat whites — much nicer and far cheaper.

I went on to explain the importance of iron ore and coalmining, the huge fees we charge Asian students for university education, and how financial services make up a bigger chunk of our economy than any other developed country.

And, with the highest paid political class in the world, Canberra is overflowing with talent, producing reports, inquiries and ministerial talking points with a finesse hitherto unseen.

It was a bit worrying I couldn’t venture much else. Amid all the excitement this week about tax cuts and back-to-back interest rate cuts to record lows, it’s easy to overlook our dependence on the housing market for confidence in our economy. It’s easy to forget about the near absence of structural reform — if you exclude huge new spending programs with questionable benefits such as the National Broadband Network and National Disability Insurance Scheme — for almost 20 years.

Britain, Germany, the US and Japan — the latter widely (if wrongly) seen as economically dysfunctional — have each enjoyed higher economic growth per person than Australia since 2010, according to recent analysis by Oxford Economics. Our uninterrupted growth across 28 years is built on rapid population increase. If the US let most of Mexico move to Texas, its economy would be a lot bigger too.

We’re slowly falling down the global living standards league table. You feel it already when you go to buy something abroad or shop online at home. Our currency has sunk in value despite our major exports fetching the highest prices they have in years.

Productivity growth, the ultimate linchpin of our living standards, has slowed as the economy ossifies. The rate of entry of new firms into the economy has fallen more than 20 per cent since the 2000s, the Treasury pointed out last month. Similarly, workers’ “switching rate” between jobs has declined 17 per cent, suggesting workers are less willing to take risks. Adjusted for population, the economy has been shrinking.

Meanwhile, debt continues to mount. Home sales, prices and credit growth boomed for years until 2017, but regulators and government did little to stop it, belatedly introducing some caps on interest-only and investor loans which were hastily withdrawn when prices started to fall. Indeed, in the wake of a royal commission into financial services that highlighted irresponsible conduct, the banking regulator yesterday ­watered down responsible lending rules in place since 2014.

The combination of lower mortgage rates and weaker lending rules will almost certainly revive house prices and loan growth in coming months. We’re coming for you, Switzerland, the only other country with as high a share of household debt to gross domestic product.

Higher house prices boost confidence for a while. Borrowing from the future flatters economic growth statistics today, but it’s mathematically impossible for credit to grow faster than incomes forever. The Reserve Bank can pull the interest rate lever only one or two more times before it too must start creating money out of thin air to buy up assets — quantitative easing — in a bid to hold down interest rates.

The prospects for politically difficult reform aren’t great. The government is hailing the partial return of bracket creep in five years, legislated this week, as a major reform. It’s even getting away with telling everyone income tax won’t exceed 30 per cent by then, when the Medicare levy (an income tax with no relationship whatsoever with health costs) means the marginal rate most people pay will drop from 34 per cent to 32 per cent. The tax system in 2024 will have the same structure and complexity it had in 2001, taxing wages ever more heavily while land and inherited wealth remain relatively untaxed.

The Productivity Commission’s “to do” lists have been ignored, along with umpteen other reports that gather dust in ministerial offices. It’s easier to look to the Reserve Bank to cut interest rates than cut wasteful public spending or induce competition among the oligopolies that siphon billions out of household income.

That might not be so bad if monetary policy were effective. The Reserve Bank’s latest series of interest rate cuts reflect the failure of central banks to return their ­financial systems to “normal”. Interest rates plummeted after the ­financial crisis and, despite the US Federal Reserve’s short-lived efforts to lift them, look set to settle near zero. They reflect an emerging crisis of confidence in central banks’ economic models, which assume (with precious little evidence) a strong link between interest rates and inflation on the one hand and between the unemployment rate and wage growth on the other, when the past decade’s experience points to none.

The Reserve Bank worries about losing its credibility if it fails to achieve its inflation target of between 2 and 3 per cent. Never mind surveys showing people think inflation is 4 per cent a year, while few would know the RBA has an inflation target. Most households would see cheaper goods and services prices as a good thing.

It’s not even clear inflation is so low. The price of gold reached a record high this week, after the Reserve Bank cut interest rates for the second time in as many months. An ounce of gold in Australian dollars ticked up to almost $2040 — 19 per cent higher than a year ago — after the cash rate dropped to a new record low of 1 per cent. Clearly, not everyone thinks inflation is low. The stockmarket is about to burst through its record high, set back in 2007.

Including house prices in the consumer price index would have produced an annual average inflation rate around 0.6 percentage points higher since 1998, according to recent analysis by Commonwealth Bank economist Gareth Aird. In keeping with global practice the CPI excludes the cost of servicing a mortgage and the land component of buying a home (which is the bulk of the ­purchase).

The jobless rate may not be as low as politicians say it is, either. Market researcher Roy Morgan puts the jobless rate at 9.2 per cent — almost double the official 5.2 per cent rate — by including people who want work but haven’t applied for a job in recent weeks. And it says the underemployment rate — people who’d like to work more hours — is 9.4 per cent. If almost a fifth of the labour force wants to work more but can’t, no wonder wage growth is weak.

It’s hard to see how we shake off ultra-low rates without a global agreement among central banks or a crisis that dislodges the “inflation targeting” paradigm that generated low rates in the first place. But the newly elected government, seemingly with a working majority in parliament, has no excuse for avoiding tougher reform decisions. Great weather and nice coffee won’t be enough if China catches cold.


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