The end of growth?

The end of growth has suddenly become a fashionable topic. You see it in books and magazine articles, all arguing that we can no longer expect growth of the type once taken for granted.

Sustainability provides one thread in the discussion. Its proponents argue that growth has become unsustainable on resource and environmental grounds. A second thread focuses on technology. The great technological gains that began with the first industrial revolution and which drove economic growth and transformed life have been exhausted. Demographic change and the consequent aging of the population in many countries provide a third thread. We have fewer workers relative to the size of the population, further dragging on growth.

In combination, these forces reduce the return on all types of investment. The golden days are behind us. It’s quite enough to make one splutter into the morning coffee! But are the arguments right? The short answer is partially yes, but mainly no.

There was always something a bit silly about our overall obsession with short term growth. Just adding together all the growth targets set in executive offices and board rooms across the country should have shown that. There was no way that the economy could grow fast enough to allow all or even a majority to achieve target. It just couldn’t happen. Yet we persisted in insisting that the emperor had clothes, that somehow targets would be achieved.

The current emphasis on sustainability is actually a useful corrective to those past excesses. But does this mean that the age of growth is over? I think that the answer is clearly no.

Just at present, the global economy is marked by two dominant changes, one short term, the other long.

In the short term, global economic activity is being dragged down by the need to clear the excesses of our immediate past. Low growth is the price we have to pay for those excesses. This isn’t new. The stagflation that marked the 1970s was the price paid for the excesses of the previous decade. The indigestion that resulted was painful, but it did ease. The same thing will happen now.

The longer term trend is far more profound because it involves a fundamental rebalancing in the global economy. It’s a structural shift as the rest of the world starts to catch up with the growth previously experienced in the west. Growth in the mature economies will be low simply because the economic base is so much larger. Further, those countries are also the ones most affected by aging populations. But, overall, longer term global growth is likely to continue at much the same average levels that we have seen over the last one hundred years.

Will the composition of that growth be the same as it has been? Almost certainly not, but then it never is, for the pattern changes all the time.

And what does this mean for Australia? Again, we are in the right place at the right time. The food and raw materials we produce will continue to be in demand. Our service sectors will benefit from proximity to higher growth areas. In all, we remain the lucky country!

Note to readers: This column appeared in the November/December edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

Global economic woes not all bad news for Australia

I have previously discussed the ending of the mining boom and the consequent weakening of the Australian economy. The first mining boom, the price boom, laid the basis for the second, the investment boom. It was always going to be the case that the end of the first would finally end the second. It’s just happened a lot faster than was generally expected.

The Chinese economy continues to slow. Chinese economic growth has been built on the twin pillars of heavy infrastructure investment and exports. Domestic consumption has been a remarkably low percentage of the economy, remarkably low because China is still a poor country, remarkably low by global standards. This pattern has been unnatural, one enforced by Government fiat. A painful restructuring is now underway.

Germany, the economic powerhouse of Europe, is going through a related process. Germany and, to a lesser degree, France gained hugely from the Euro. Had Germany retained its own currency, it would have faced significant appreciation that would have reduced the exports on which German growth depended. The wider Euro effectively gave Germany a currency advantage in the same way the undervalued renminbi gave China a currency advantage. To a degree, the rise in debts in peripheral Euro countries was a mirror image of Germany’s trade surplus. One could not exist without the other. Europe now struggles with the restructuring consequences.

Europe’s economic woes feed into China’s problems. Now add another factor.

Anybody in business knows that debt levels can become a problem when business contracts. Loan and interest repayments that could be comfortably met become a burden. Painful restructuring or even closure may be forced upon us. This is reinforced where our main customers face similar problem. They cut, we cut, and the economy goes down, creating the need for further cuts.

Europe is going through exactly the same process, adding to collective woes. It’s very easy to become depressed.

In fact, we have been through all this before. The long growth cycle that began at the end of the Second World War seemed immutable, likely to continue for ever. Then the oil shocks, the uncontrolled rise in US spend associated with the Vietnam War, brought things to a shuddering halt. The result was a decade of slow growth while the imbalances worked their way out of the system. This, I think, is just where we are now.

What does this mean for Australia? Must we share the pervading sense of gloom? The answer is no.

We still have a strong export base. As the mining boom enters the tailings stage, the pressures it has placed on other parts of the economy and on regional infrastructure will ease, will ease. Interest rates will fall. Falling interest rates with lower export prices means a lower dollar.

Barring economic catastrophe, and this seems unlikely, lower interest rates plus a lower dollar will cushion us from at least some of the economic effects. In the longer term, this period of adjustment will position us for further growth,

Note to readers: This column appeared in the September/October edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

Australia chokes on its regulatory mess

In my last column, which was written just before the federal budget was announced, I pointed to some of the strengths of the Australian economy as well as a couple of its weaknesses. Since then, the economic news has been all over the place, with international gloom warring with unexpected strength in the domestic economy. It all goes to show – as I have argued in previous columns – that businesses are better off ignoring the daily and weekly economic news.

Recently the PM’s Economic Summit has spoken of the need to improve productivity in this country, and about the importance of economic reform. And I agree. When I speak of economic reform I am not talking about taxation reform or the size of the Government, although both may be important. My focus is much simpler; I am talking about the need for immediate steps that will improve economic efficiency.

The Australian economy is choking on regulation. From schools to universities, to doctors to ordinary businesses, more and more resources need to be devoted to reporting and compliance. To help navigate the mess, we need ever more lawyers and accountants, as well as specialists in OH&S and a myriad of other fields. And while we make payment after payment, things don’t seem to get any better.

We have a taxation act of which its size exceeds the total number of pages of the entire Commonwealth economic legislation only fifty years ago. We also have a Corporations Act that seems to be the longest piece of legislation of its type in the whole world. Yet we have seen no proper national estimate of their costs. My best guess is that the direct cost is around 10 per cent of GDP. And that’s only the direct cost. We also need to consider the indirect costs.

For every dollar of direct costs, there is probably another dollar of indirect costs in terms of the scarce executive time that needs to be devoted to considering and responding to the compliance burden. There are also the costs associated with slowed decision-making and the need to get all the required ‘ticks’ across the compliance process. Recently the Business Council of Australia identified this as one of the three cost drivers that is making Australian project cost the highest in the world. We all know these things and we talk constantly about the need for change, but yet nothing happens.

Some years ago I was a member of a high-level Commonwealth taskforce that had been set up by the PM to address the question of deregulation. As we worked our way through all the Commonwealth laws and regulations affecting business (and even then there were hundreds), we found that every single regulation had its supporters who argued that it was in some way critical to the public interest. Every single abolition or reduction involved a political fight with one vested interest or another. So it’s no surprise that nothing happened in the end.

In many ways, the business community is its own worst enemy. As a community and as individuals, we demand regulation and controls to protect things that we consider to be important. Yet we complain when the cost of protecting it affects us.

If the business community really wants regulatory reform then it has to be prepared to address the problem across all aspects of Australian life, and to argue for abolition or at least simplification. I see little sign of this happening.

Note to readers: This column appeared in the July/August edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.

The future for the Australian economy

In my last column I spoke of the economic forecasting mess. Since then, the International Monetary Fund has released its latest forecasts on global growth. This was greeted by some in the Australian media with glee - “Australian economy leads the world” screamed one headline.

The reality is a little different, for the IMF is actually a good example of what I have been taking about. In recent years, its forecasts have been all over the place like a dog’s breakfast! So what did the IMF actually say? Well, not quite what the headline would suggest.

To begin with, the IMF suggested that there was some strengthening in the global economy, although this was heavily qualified in some ways with recognition of the various risk factors. But what did the IMF think of Australia? The IMF actually projected some further weakening in the Australian economy. We are still forecast to do relatively well by the standards of other developed nations, but hardly well enough to suggest that the Australian economy leads the world!

But in all this confusion what can we actually say about the Australian economy? The first and most important point is that world commodity prices will continue to weaken, reducing returns on our major exports. Why do I say this? It’s simple. The structural imbalances that developed in the global economy over the long boom are still there. They will take time to unwind. So long as they continue, global economic growth will continue to be weak. In turn, this means weakened demand for commodities.

Yet despite the fall in commodity prices, the Australian mining investment boom will continue, if at a lower level than previously forecast. Work already under way guarantees that. This means, in turn, that pressures on the non-resource sectors will continue. However, it’s not all doom and gloom.

A very significant proportion of the inputs required for all those new mines and supporting infrastructure, over 40 per cent, will be imported. With lower export prices, the current account deficit will grow. This will place downward pressure on the Australian dollar.

The Australian dollar may not go lower than now, but it will go lower might otherwise have been the case. Both export and import competing industries will be better off as a consequence. There will be more time to adjust.

But the story doesn’t end here. World growth may be slow, but it is still positive. This means that the total marketplace for Australia’s non-resource exports will grow. Importantly, the fastest growing marketplaces will continue to be in our immediate region, which gives us an advantage. The decline in commodity prices will also increase the relative return on non-mining investments, encouraging investment outside mining.

Taken together, we are likely to see a smaller resource sector than would otherwise have been the case, a larger non-resource sector.

For the present, the Australian economy should continue to grow if below the trend rate - and the biggest immediate economic risk? It’s actually the budget!

By the time you read this, we will know what Treasurer Swan has in mind. Looking at the numbers, the size of the apparent spending cuts required to return the budget to surplus will place considerable downward pressure on economic activity. That pressure will be felt most by the non-resource sectors of the economy, just those sectors adversely affected by the mining boom. That would be a pity.

Note to readers: This column appeared in the May/June edition of Australian Business Solutions magazine. It was written just before the budget. It's not on-line, so I have re-published it here.

Navigating the economic forecasting mess

It is extremely difficult to keep a level head in the face of current economic forecasting and reporting. One minute it’s all doom and gloom, the next things suddenly seem better.

The gyrations have been quite remarkable, beyond anything in my own experience. They have also continued for some time now - since the onset of the global financial crisis, in fact. Measures of consumer and business sentiment have followed the gyrations.

From a practical business perspective, both economic forecasting and reporting have become a burden. They affect, but do not inform.

So how do you navigate your way through this mess? The first thing to remember is that forecasts are just that - forecasts. In all cases, they rely on past data and incorporate assumptions about the structure of the economy and of the relations between different types of economic activity.

But there is a further problem. Most prominent business economists work for financial institutions. Because their primary internal role is to provide advice on what might happen in financial markets, the economic reporting that follows from their public utterances is also markets’ focused. This means that both forecasts and reporting often do not provide the type of longer term information most businesses require.

Business wants answers to questions like: What’s happening to my market place or to my costs? By contrast, many forecasters and reporters are concerned with the immediate market impacts of changes in longer term expectations. How will it affect the dollar or shares, or the financial markets in general?

Perhaps the best course may just be to ignore the whole lot unless there is something there that seems directly relevant to your business! If this sounds extreme, consider all the reporting of interest rates over the last twelve months. How much of that has actually been in any way useful to the majority of Australian businesses?

I am not saying that you should ignore economic conditions or all economic reporting. I am saying that you should be selective and focus on information relevant to your needs.

Say that you an engineering business that provides components to certain firms in certain sectors. It is safe to say that you have a direct interest in developments in those sectors and especially in your own customer base. This includes the likely demand for your own products or services, as well as payment patterns. It is critical that you know if your customers paying more slowly and, if so, why?

If, like most businesses, you have borrowings, then you are interested in interest rates. But, more importantly, you are also likely to interested in the availability of credit.

Each business needs to define the economic information that is directly relevant to their needs. A lot of people in business do not focus properly on the economic and industry conditions that are relevant to their businesses. They will tell you how awful the economy is when, in fact, their business is doing just fine. These perceptions about the economy can affect actions, and the results can be quite damaging.

Note to readers: This column appeared in the March/April edition of Australian Business Solutions magazine. It's not on-line, so I have pre-published it here.

How do we break free from the ratings entanglement?

In December, Treasury Secretary Dr Martin Parkinson took a swipe at the global ratings agencies.

They were, he is reported to have said, “becoming mechanistic and excessively simplistic, running the risk of moving from excessive optimism to excessive pessimism every time they look at a country or firm.”

It’s worse than that. The global credit rating agencies have become a cancer eating away at the global economy, one that affects every business.

In the lead-up to the global financial crisis, they gave triple A credit ratings to institutions and securities that were clearly not. That helped fuel a global financial bubble.

As the crisis unfolded, the variations the agencies made to country and institutional rankings added to market instability.

We saw the same thing in the unfolding crisis with the Euro.

The credit rating agencies provide no new information to the market. The standard of their economic and financial analysis is clearly suspect. Yet despite all this, a shift or threat of a shift in a county’s credit rating can have damaging or even catastrophic market effects even though it tells us nothing that we didn’t already know.

It’s actually our own fault, yours and mine. Let me explain.

Our problem, and it is our problem because it affects us all, lies in the way that we awarded the ratings agencies authority without responsibility. We created the cancerous monster.

Back in a now dim and distant past when I was working in the Commonwealth Treasury, I remember discussions on the possibility that Australia might get a triple a credit rating for the first time. We did, lost it in 1986, then finally got it back in 2003.

Australia’s original concern with its credit rating at state and Federal level made a lot of sense.

In those days, both State and Federal Governments borrowed to fund infrastructure. We needed access to global capital for both private and public purposes. A high credit rating made it easier for a small relatively remote country like Australia to access funds and at a lower cost.

Sadly, from being a means to an end, the maintenance of a triple A credit rating became an end in itself. All Australian Governments preached this as a badge of honour.

Those in the business community nodded their heads and made approving noises, even though it was obvious even to Blind Freddy that much of the ratings shifts actually didn’t matter very much.

Governments throughout the world then did something worse. They built the ratings into policy, procedures and regulation. Business and especially the finance sector followed.

This institutionalisation of agency ratings, their incorporation into so many regulations and arrangements, meant that variations in credit ratings had direct flow on market effects in ways that no-one had foreseen. The ratings system itself had become a direct cause of market instability and on a large scale.

You would think that we would learn, but no! Even as Treasury Secretary Parkinson is complaining about the agencies, we see Federal Treasurer Swan, NSW Treasurer Baird, quoting rating changes approvingly as evidence of their good economic management.

Politicians respond to their electorates, that’s part of their job. But surely it’s time for the Australian business community as a whole to say enough is enough, that Australia and the world must break free from the ratings entanglement that we have created?

Note to readers: This column appeared in the January/February 2012 edition of Australian Business Solutions magazine. It's not on-line, so I have pre-published it here.