Tuesday, August 16, 2011

Belshaw's World - euphoria to ill-informed economic future

Note to readers: This post appeared as a column in the Armidale Express on 10 August 2011. I am repeating the columns here with a lag because the Express columns are not on line. You can see all the columns by clicking here for 2009, here for 2010, here for 2011.

This week I listened to the almost breathless reporting on the economic news with a degree of bemusement. It was hauntingly familiar.

I was in Shanghai when the global financial crisis broke. I watched it all unfold on international TV.

Back to Australia, I was struck by the almost total disconnect between local reporting and my own perceptions of the Australian economy. No matter which way I cut the numbers, I couldn’t see how the worst case outcomes that people were talking about could actually occur.

I was right, of course, and for the reasons I thought. Now something of the same disconnect seems to be occurring again.

Human beings can be strange.

Prior to the global financial crisis Australian talk focused on boom. Then, suddenly, we went from almost euphoria to despair.

As we came through the global financial crisis relatively unscathed, we went back to talking about boom. Mining Boom Mark II was born.

There was no such thing as Mining Boom Mark II, of course. It was just a continuation of previous events. It only seemed a new boom because of our varying perceptions.

In the midst of the euphoria, I found my self playing a Cassandra role. It is simply not a good idea to count on the golden egg before it’s actually laid!

Now as we plunge back into gloom, exactly the same issues arise.

At a purely domestic level, Australia is well positioned to ride out the current troubles. Our budget position is sound, and we very little national debt.

The big difference now as compared to the global financial crisis is the exchange rate.

As the global financial crisis hit, the Australian dollar fell because people saw it as risky. Again, this was a very silly thing in economic terms because of the strength of the Australian economy. However, it gave us an added buffer to help us ride out the shocks.

This time our dollar is very strong. Again, there is not really a rational reason for the dollar’s current strength. It just is.

Most Australians don’t realise that the Australian dollar is the fifth most heavily traded currency in the world.

Relative to the size of our economy it is not as heavily traded as, say, the Swiss franc or the New Zealand dollar, but it is still a very heavily traded currency. This means that the value of the currency moves as markets dictate independent of real changes in the Australian economy.

The fact that our dollar is so high is hurting us, but our basic economic position is still strong.

Outside Australia, I just don’t think that the global economic position is as gloomy as people think.

The big global problem is that we are going through a period of adjustment that combines longer tem structural change with the need to work through past excesses.

The longer term change is the shift in relative economic power from the mature developed economies to the developing economies. This would have required adjustments in any case. However, these adjustments are complicated by the way we have overspent as consumers.

Throughout most developed countries, the combination of easy credit with rising asset prices allowed us to spend more and save less. This drove apparent economic growth. Now the process has gone into reverse.

All this means that many countries are likely to experience slower economic growth, even economic stagnation, until balance is restored. However, that’s a very different issue from some of the gloom talk we are now hearing.

In all this, China remains the big question mark for Australia.

China’s current phase of economic growth is coming to an end.

Chinese growth has been export led, supported by a large underemployed workforce, very high domestic savings, very high investment and an artificially low currency. The Chinese economy has become unbalanced, imbalances that are in fact the mirror image of imbalances in the developed economies.

The next phase of Chinese growth is likely to see a stronger domestic focus, a rise in Chinese consumption, together with some restructuring in Chinese industry as domestic wage costs rise. Some Chinese manufacturing is already shifting to lower cost countries.

I don’t see this as a necessary problem from an Australian perspective. However, it does pose some short to medium term threats to our more optimistic projections.

Nobody can deny that we do not face significant challenges. My point is that we are not well served by current reporting in coming to properly understand them.


Greg said...

One of the big drivers of the Chinese economy has been the move to modernisation and indistrialisation, but that cannot continue forever. It must slow sooner or later.

For example the new Chinese HSR network alreay exceeds 8000km. It is expected to exceed 13000km by the end of 2012 and up to 16000km by 2020. How many more km of HSR can by justified in a country which is still predominantly rural and peasant?

Also China is building dozens of new cities every year and plans to build up to 50,000 new towers in the next two decades. That is said to be the equivalent of 10 New York Cities! Even for a country of a billion people how are these towers expected to be filled?

This is quite worrying. What is fuelling this growth? It isn't demand because many of the new cities are empty ghost towns. Some cities built for 300,000 people are occupied by just a few tens of thousands. In other cases completely empty cities only half finished.

Check out this link: http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-Satellite-images-cities-lying-completely-deserted.html

It would seem that this growth is artificial and unsustainable - fuelled by regional administrations who are judged purely on growth numbers. It may be fuelling an asset bubble primed to pop. I have no personal knowledge of what is happening in China, only what I have read in the media which is often prone to exaggeration. The media loves a beat up.

Nevertheless, I hope that Australia hasn't hitched it's wagon too tightly to China because it just might be heading for a train wreck. With 2 trillion dollars of Chinese money invested in US government bonds China cannot afford to see a rout in US bond markets. If that happens our China driven resource boom may well go bust.

Jim Belshaw said...

That was a fascinating link, Greg. I will bring it up in a main post on my personal blog.

I think that your analysis of China is pretty spot on. We can still expect large movements to the cities because of the continuing shift of population from the country. However, China's overall population growth is slowing fast, while the population is aging.

There has been a lot of discussion about imbalances in the Chinese economy - see http://mpettis.com/ for some good analysis.

I have been arguing for a while about the need to avoid over-reliance on China.

Stu said...

Australia's reliance on China is especially worrying for mining industry in New England. A lot of people have gotten used to being paid $150,000 a year to drive trucks on the mines and when the music stops I don't think they'll be prepared! A lot of lime green ss utes may hit the market soon.

Jim Belshaw said...

I suspect that you are right, Stu, although it might take a little while longer than that. I guess that one of the key issues is the best way of capturing now gains for longer term benefits. That's hard when we don't have our own government!