19
Mar
2012

A Quick Stock Take on the Economy

Forget the details for a moment and let’s have a look at the big picture, tops down view of the Australian economy.

read more

Posted in Stephen Koukoulas | Leave a comment
19
Mar
2012

The IPA’s Tim Wilson and his useless poll

The IPA has just released a new poll covering household attitudes to prices.  The IPA’s Policy Director, Tim Wilson, concludes:

  • “Australians are most concerned about electricity costs of all the major household expenses”.

 Mr Wilson goes on:

  • “The poll clearly shows energy (electricity and petrol) prices continue to make Australian families nervous with 58% raising it as their biggest concern.”

The poll is hopelessly flawed based on the evidence included in the Press Release and the comments made by Mr Wilson.  It is a useless guide given its very narrow coverage.

Consider this:  there were only five items in the IPA sponsored poll of prices “you are concerned about”.  There were food, electricity, mortgage payments, petrol and public transport. 

The Consumer Price Index, which measures changes in prices, is based on the household expenditure survey and covers 87 expenditure classes and thousands of separate items including all major goods and services purchased by an average household.

While mortgage payments are not in the Consumer Price Index basket of goods and services, the other four items polled for the IPA cover 22.8% of average household expenditure.  The other 77.2% covers household spending on things like alcohol, tobacco, clothing, footwear, rent, furniture, household equipment, health, cars, communication, housing, electronic goods, holidays and education, to name just a few of the other items. 

If you take food from the IPA result, the remaining three items (electricity, petrol and public transport) make up a puny 6.4% of the CPI basket.  In other words, for every $100 that an average household spends, only $6.40 is spend in total on electricity, petrol and public transport.

The headline grabbing distortion from the IPA Press Release (and many others for that matter) focusing on electricity prices should be viewed in the context of the fact that electricity makes up just 2.1%, yes 2.1%, of the average household expenditure.

  • Consumers spend 255% more on meals out and take away food than they do on electricity. 
  • Consumers spend 3% more on beer than they do on electricity.
  • Consumers spend 10% more on tobacco that they do on electricity.
  • Consumers spend almost 20% more on wine and spirits than they do on electricity.
  • Consumers spend 42% more on communications than they do on electricity.

This is just a small sample of the mass exaggeration of the impact of electricity price changes on the household budget and today’s distortion from the IPA.

To have any credibility, the poll should have covered a wider range of items.  The IPA have been very cheeky twisting and spinning the survey to get a result that will obviously grab a few headlines today and tomorrow by highlighting electricity prices as an issue.

Presumably with a straight face, Mr Wilson suggests:

  • “there’s no relief in sight with electricity prices set to increase further as a result of the July 1 start of the carbon tax”.

It’s a pity that its narrow focus means that the results of the survey are almost meaningless and the IPA has wasted its money on such a meaningless poll.

Posted in Stephen Koukoulas | Leave a comment
16
Mar
2012

The 2013 Election: Who’s Vulnerable?

The Antony Green election pendulum points to a number of issues which might make for another close result at the Federal election in 2013.

Here are a couple of observations:

  • Labor holds only 8 seats with a margin of 2.5% or less, while the Coalition holds 14 seats with a margin of 2.5% or less. 
  • Labor holds only 14 seats with a margin under 4%, while the Coalition holds 19 seats with a margin of 4% or less.
  • Looking at even wider parameters and the pendulum shows that Labor holds 25 seats with a majority of 6.0% or less, while the Coalition has 30 seats that, on a bad day, are vulnerable with a majority of 6.0% or less.

I am not sure quite what to make of this all, other than to note that if Labor loses a number of the seats that would be appear most vulnerable (margins under 4%), it might get lucky and have a chance of picking up some of the current Coalition seats that were close in 2010.   This is particularly the case with the knowledge that uniform swings never happen.

Posted in Stephen Koukoulas | Leave a comment
15
Mar
2012

Another Word on Peter Costello

In analysing the Australian economy, does former Treasurer Peter Costello really think that:

  • “If the journey [towards higher debt] keeps continuing at the rate in the years ahead that it did in the last three or four years it won’t be too long before we start experiencing European-type problems.”

Or is it that in pretending Australia has “a mountain of debt” Mr Costello is simply playing politics?

It is fair enough if Mr Costello is simply playing politics and trying to make a few cheap points, however misplaced they were.  But it should be seen for what it is.  It is very difficult, if not impossible, to find anyone outside the Coalition Parties who have such a view on Australia.  If anyone reading this knows of any analyst anywhere in the world who shares Mr Costello’s view that Australia is close to experiencing European-type debt problems, please let me know.

Which brings me to Mr Costello’s appearance on 730 last night. 

Mr Costello suggests the search for a new Chairperson for the Future Fund was “a shemozzle” that hurt the reputation of the Future Fund, whatever that means.    

Does Mr Costello really think this or is he again just playing politics as he did with his fairies-in-the-bottom-of-the-garden analysis of Australia’s debt position?  Or is there an element of sour grapes from him that he was not chosen for the Future Fund role?

Posted in Stephen Koukoulas | Leave a comment
14
Mar
2012

Peter Costello’s Future not at the Fund

There is a list as long as your arm to show why any sensible person would never consider Peter Costello as a candidate to head up the Future Fund.

One important item on that list is his judgment.

The head of the Future Fund takes responsibility for investment decisions and the asset allocation of the $73 billion portfolio. 

Based on Mr Costello’s recent comments, he would no doubt convert his words to actions and sell a large proportion of the Fund’s current holdings of Australian assets.  

Consider what Mr Costello said in January:

  • Australia will end up in the same economic position as Europe if the government doesn’t start to curb spending, says former Liberal treasurer Peter Costello.   ”Europe at the moment is suffering under a mountain of debt that it can’t service,” he told Macquarie Radio on Tuesday.  Australia’s longest-serving treasurer warned Labor to heed the lessons implicit in Europe’s demise, saying the government could only spend money it doesn’t have “for a while” before it will end up using all of its income to service its debt.  “This is what I have been warning about here in Australia for some time,” he said.
  • “If the journey keeps continuing at the rate in the years ahead that it did in the last three or four years it won’t be too long before we start experiencing European-type problems.”

With that view, of Australia about to experience “European-type problems”, any fund manager including the Future Fund, should massively downsize its Australian denominated assets.  But would it be wise for the Australian sovereign wealth fund to be selling its Australian assets in such a way.

If it did, it would create unimaginable ructions in Australian financial markets and go against what just about every other fund manager in the world is thinking right now with a massive overweight position in Australia.  And if that view is wrong, it would cost the Fund and hence the tax payer a huge amount of wealth.

I am also reminded of Paul Keating’s assessment of Peter Costello when goodie two-shoes Prime Minister Rudd had a warped good samaritan experience and appointed Costello to the Future Fund’s Board of Guardians:

Keating said in late 2009:

  • Mr Keating accused Mr Costello of presiding over the growth of Australian debt abroad from $129 billion in 1996, to $705 billion in 2007.
  • ‘‘The Future Fund is all about national savings, yet, during Costello’s period as treasurer, national savings were so depleted,’’ he said.
  • ‘‘Costello was a policy bum of the first order who squandered 11 years of economic opportunity.’’

That may be a slight exaggeration, but the sentiment is spot on.

Posted in Stephen Koukoulas | Leave a comment
13
Mar
2012

Rate Cut Urgently Needed: Business Confidence & Consumer Sentiment Limp Along

The last two days have seen the monthly updates on business conditions and consumer sentiment.

Both seem to be locked into a groove below their long run averages which unsurprisingly, is consistent with the economy rolling along at a little below trend. This latter point was confirmed last week when the national accounts confirmed GDP growth at just 2.3% through the course of 2011 and we saw another poor employment report.

In the NAB survey, business confidence fell 3 points to be +1; while business conditions rose 1 point to +3. Both measures are below their long run averages. If we were to take out the mining sector, both confidence and conditions would be negative.

Consumer sentiment is in a more parlous state. The Westpac-MI index of consumer sentiment fell 5.0% in March to be at 96.1 points which again is well below its long run average and consistent with quite moribund levels of spending. It is actually not that far from levels normally seen during consumer recessions.

These results, on top on the other numbers in recent weeks suggest that monetary policy should be tweaked to the easy side – that is, there probably should be AT LEAST another 50 basis points of rate cuts sooner rather than later as the mining and resources boom does not provide enough impetus to offset the general weakness elsewhere.

The RBA knows too well that fiscal policy will unambiguously be restrictive, the AUD is over-valued and therefore acting as a hand break on the economy and that interest rates are at best, neutral.

While the RBA clearly should have cut in February and/or March, all is not lost. The next RBA Board meeting is 3 weeks away and it can catch up then with a 25 point cut.

More rate cuts after that will be likely as it sees low inflation, a tick up in unemployment and weaker Chinese growth all coming through. It is still on track to cut to 3.5% – in the next few months which should help to support growth and help prick the AUD bubble.

Posted in Stephen Koukoulas | Leave a comment
10
Mar
2012

Judith Sloan’s Answer to Everything – Cut Wages!

It’s not the rudeness, disparaging comments or thoroughly offensive antics of Judith Sloan that were at issue in the radio discussion I was involved in this morning on the economy, universities and other matters (listen here -  http://tiny.cc/nsizaw  ), it was the vacuous line that she took in discussing every issue.

Among the interruptions and bluster, Ms Sloan failed to mention any facts to support her assertions, and floundered over some very basic issues covering the mining tax, how to deal with any future global economic shock and fiscal policy.  Quite astoundingly, her only answer when repeatedly questioned about what she’d do if Australia confronted another GFC type event was to cut wages.  Not sure if that helps highly geared consumers or their banks or do much for the supply of labour either.

There were other issues she mentioned which on reflection had little factual support, but listen to the discussion and form your own views.

Posted in Stephen Koukoulas | Leave a comment
8
Mar
2012

Trade Balance Dives into Deficit

We all know not to take too much notice of one monthly data point, but the dreadful trade data for January are a little disconcerting.  Far from the usual run of monthly surpluses around $1.5 billion, in January, a $2 billion slump in exports saw a deficit of $673 million registered.

Now it might be a one-off – a quirk due to a seasonal change, or a few ships not leave until 1 February or some other issue.  It is not clear.  But what we do know is that the world economy is slowing, to below trend as the RBA puts it; we know commodity prices (in USD terms) have fallen; and we know the Australian dollar was rising without fundamental support.

The potentially poisonous trifecta of a weak world, lower prices and an over-valued AUD just might be having some impact on the trade data.  If so, it would be another item to move from the “Good News” side of the economic whiteboard to the  “A bit Worrying” side.

It suggests that in addition to the increasingly urgent need for the RBA to cut interest rates for domestic growth reasons, interest rates set a notch or two lower would help take a little froth out of the AUD bubble.

Posted in Stephen Koukoulas | Leave a comment
8
Mar
2012

Prudent Fiscal Management – Who’s Your Daddy?

I was going to have a break from looking at the Coalition’s claims surrounding fiscal policy, budget management, tax and government spending.

But Opposition Leader Tony Abbott popped up today with this quote:

  • “As the Howard government demonstrated prudent fiscal management is in the Coalition’s DNA. It’s what I learned during nine years in the Howard ministry, seven years in the Howard government and six years as John Howard’s leader of the House of Representatives.”

Regular readers may know some of the fiscal facts, but I will repeat the key ones in looking at the Howard Government’s “prudent fiscal management”.  I will, for the sake of context, make some comparisons with other governments.

Before kicking off, I must confess I don’t know what Mr Abbott means when he says “prudent fiscal management”.  If it means being the highest taxing government in Australia’s history, Mr Abbott is absolutely spot on.  It certainly was in the Howard Government’s DNA.

Let’s look at the tax to GDP ratios for the last 4 governments over almost 4 decades. 

GOVERNMENT

Average tax* to GDP ratio

Highest

Lowest

Fraser

20.8

21.7

19.7

Hawke/Keating

21.8

23.3

20.0

Howard

23.4

24.2

22.2

Rudd/Gillard^

21.6

22.8

20.0

* Does not include non-tax receipts.

^  Includes forward estimates to 2014-15.

On this measure, the Howard government stands out as a taxer without peer – its average tax to GDP is 1.8% of GDP higher than the average for the current Labor Government and even 1.6% of GDP higher than the Hawke/Keating years.   In 2012-13 dollar terms, that’s a tub-thumping $30 billion in extra tax every year in the 12 Howard Budgets.  A total of $360 billion worth of smackeroos.

And it is not just a one-off windfall in tax that proves this point.  Going back to 1980-81, the Howard government holds the honour of having the:

  • highest, second highest, third highest, fourth highest, fifth highest, sixth highest and seventh highest ever tax to GDP ratios.  

Not bad given it was in office for only 11 and a half years.   

In something to blow your socks off, since 1980-81, Labor has the honour of having the:

  • lowest, second lowest, third lowest, fourth lowest, fifth lowest, sixth lowest, seventh lowest and eight lowest tax to GDP ratios.

What about government spending:

GOVERNMENT

Average spending to GDP ratio

Highest

Lowest

Fraser

24.2

25.8

23.4

Hawke/Keating

25.6

27.5

22.9

Howard

24.2

25.1

23.1

Rudd/Gillard^

24.3

26.0

23.6

^  Includes forward estimates to 2014-15.

The notable points on government spending was how high it was under the Hawke/Keating Government, although it must be noted that that government had to tackle two nasty global recessions and used Keynesian policies to deal with each one.   

There was only one mild global recession for the Howard Government to confront and it is interesting to note that during period, its spending to GDP was at the high point of 25.1%.

It is also notable that the government spending levels under the current Labor Government and the Howard government are all but the same – and this includes the spending measures in the GFC inspired fiscal stimulus in 2008-09 and 2009-10.

Then there is the assessment of sovereign risk or fiscal management from the credit rating agencies.  Never once did the Howard Coalition Government have a triple-A rating from all three major credit rating agencies – Standard & Poors, Moodys and Fitch.  Never.  Late last year, with Labor in government, Fitch upgraded Australia which meant for the first time ever, all three agencies rated Australia triple-A.  That’s a pretty glowing independent endorsement.

For good measure, let’s have a look at how many Coalition Treasurers have been given the “World’s Greatest Treasurer” accolade.   None.  Labor have had two, Paul Keating and Wayne Swan.

I may have misinterpreted Mr Abbbott’s definition of “prudent fiscal management” and the fact that it is in the Coalition’s DNA, but I’m sure he’ll clarify what he means some time soon.

Posted in Stephen Koukoulas | Leave a comment
7
Mar
2012

Mr Robb’s Letter to the Editor

Today’s The Australian carries the following letter to the editor from Shadow Finance spokesperson, Andrew Robb.

I have reproduced it in full.

Debt comment clarified

In response to your editorial (“The Coalition’s credibility gap”, 7/3) it was asserted that I “stumbled” by “erroneously” comparing Australia’s debt to Ireland’s and Iceland’s.

The Australian can do much better than repeat Labor’s subsequent misrepresentation of my comments.

I simply referred to the research of one of the world’s leading economists in Kenneth Rogoff, which showed that the growth in Australia’s gross debt since Labor came to office is third only to the growth of debt in Ireland and Iceland.

This helps demonstrate why Australia’s economy is vulnerable to any downturn in commodity prices, given our structural deficit which is 30 per cent worse than Italy’s.

Andrew Robb, opposition finance spokesman, Canberra, ACT

In writing the letter, Mr Robb has only gone to highlight the absurdity and deception of those comments.  It shows a deep misunderstanding of public finances and the economy.

For those who read this before, I apologise for repeating, in full, my analysis of Mr Robb’s comments.  It was from my blog posted on 16 January 2012.  Every word and number remains correct.  Foreign investors should be very worried if this is the sort of economic analysis that the alternative government is discussing at a time when Australia’s fiscal position is the envy of the world.

 

 

OMG!  The Coalition Parties seem to be keen to keep on highlighting their frightening ignorance on economics and economic management.  Even basic maths seems to be an issue sometimes.

It perhaps wouldn’t matter so much if it were an odd backbencher shooting from the hip, but this time it is the Shadow Finance Minister, Andrew Robb, mouthing an analysis of Australia’s debt and fiscal position that would be humiliating to any high school economics student, let alone someone wanting to run the budget of Australia’s $1.5 trillion economy. 

In The Australian today, Mr Robb is quoted:

  • “growth in the nation’s level of indebtedness since Labor came to power has been outstripped only by global financial crisis casualties Iceland and Ireland; it [the Opposition] warned of a European-style budget crisis here.”

Mr Robb also said:

  • “Under Labor, commonwealth debt in gross terms has grown by around 250 per cent, putting us third only behind those powerhouses Iceland and Ireland.”  

What?  Is this a mistruth or a very basic misunderstanding?

The facts show that Australia’s net debt is projected to move from a net asset position of 3.8% of GDP in 2007-08 to a net debt position peaking at 8.9% of GDP by 2011-12 - a widening of around 13% of GDP.

According to the IMF data base, Iceland’s net debt is projected to rise by 58% of GDP, from 11% in 2007 to 69% in 2012.  Ireland’s net debt is projected to rise by 92% of GDP from 12% in 2007 to 104% in 2012. 

Then there’s this suggestion:

  • Mr Robb said a commodities slump could push Australia into European budget crisis territory. “Debt just keeps growing under this government and if we experience any downturn in commodity prices the $50 billion budget deficits that have become the norm under Labor will stretch out as far as the eye can see,” he said.

 Let’s have a look at some of those “European crisis levels” of net government debt:

Between 2007 and 2012, net government debt is projected to rise by 53% of GDP in Greece (from 105% to 158%); Portugal 32% of GDP (from 58% to 90%) and Spain 30% of GDP (from 26% to 56%).

As an aside, according to the same IMF database, net debt in the US is projected to rise by 35% of GDP between 2007 and 2012 (from 42% to 77%); in the UK, the rise is 41% of GDP (from 38% to 79%), while in Italy, is a relatively modest 13% of GDP albeit from a high starting point (from 87% to 100%).

All of which make’s Mr Robb’s claims completely ridiculous and for him, quite embarrassing. 

Posted in Stephen Koukoulas | Leave a comment