Is Australia's trade position as good as it seems?

On 6 July 2010 the Australian Bureau of Statistics released the latest Australian trade in international goods and services figures.

You can see from the attached graphic how the balance of trade on goods and services has returned to positive. This was greeted with a degree of glee. However, the results are not as clear cut as that. 

A very significant contributor to this result was a rise in non-monetary gold exports. These rose in seasonally adjusted terms by $772m or 66 per cent.

We can compare this with:

• an increase in rural exports in seasonally adjusted terms of $235m, up 11%
• An increase in exports in seasonally adjusted terms of non-rural goods of $385m, up 2 per cent.

The main components contributing to the rise in seasonally adjusted estimates for non-rural goods were:

• coal, coke and briquettes, up $329m (10 per cent)
• metal ores and minerals, up $157m (up 3 per cent)
• other manufactures, up $52m (up 4 per cent).

If you look at these numbers, you can see just how important gold was.

If we now look at other aspects of trade performance, I have had a particular interest in services, in part because of the importance of Australia's international education sector. I have been monitoring this closely because I expect this to drop by at least a third over the next year.

The adjoining graphic shows just how flat Australia's service exports have been. The country is simply not doing very well here.

While the overall return to surplus on trade in goods and services is welcome at this point in the cycle, it seems to me to be vulnerable.

In do try to adopt a slightly contrary position in my analysis. By this I mean that I like to test common assumptions and views. I am been concerned for a little while that the structure of our trade has been increasing Australia's economic vulnerability. However, detail here is a matter for another post.  

Australian employment increases May 2010

This graph from the Australian Bureau of Statistics shows the increase in Australian employment since May 2090. As a consequence, the Australian unemployment rate as measured by the statistics has dropped to 5.2 per cent.

In a post on my personal blog, Economic clouds gather, I wondered about the sustainability of the current Australian recovery.

I am still wondering. However, for the moment things remain positive.

Employment is generally a lagging indicator. The continued increase in employment should feed into further growth through increased demand. 

Increase in the New Zealand cash rate

The New Zealand Reserve Bank has increased the New Zealand cash rate because of the strengthening of the domestics economy. Of more interest, was the Bank's perception of the economic outlook.  This is broadly positive.

Profits, performance measurement and management

Over on my personal blog, I have had two posts looking at profits (here and here). Here I just wanted to flag a specific point.

My problems with our current focus on profit fits within the concerns that I started to outline in my reforming Australia's public policy series: the combination of focus with systemic rigidities.

Profit is a good thing. No profits, the business goes down, the economy suffers. In any market system, there will be businesses that can't make enough money and will go the wall. That's part of the economic adjustment process. But what happens when a focus on short term profits starts building instabilities into the whole system?

My view is that we are at this point now.  

Lessons from the national school build program

The Australian National Audit Office's report into the operations of the National school build program makes for fascinating reading for someone like me interested in the details of management. While the report does not provide the type of smoking gun that the Australian opposition would have liked, it does provide an insight into the problems created by the Rudd Government policy approach and associated administrative structures and styles.

Although no-one so far has looked at the connections, this is in fact the second report into the operations of what are called National Partnership Agreements. The first came with the release by Indigenous Affairs Minister Jenny Macklin at the end of August 2009 of a report reviewing the initial operations of the $672m Strategic Indigenous Housing and Infrastructure Program. This program became part of the National Partnership Agreement on Remote Indigenous Housing and was intended to deliver 750 new houses by 2013 in Northern Territory remote indigenous communities. My then analysis of the report can be found here.

The ANOA report describes the overarching framework that is meant to guide Commonwealth-State arrangements in these terms:

Delivery of programs that span Commonwealth, state and territory
jurisdictions has been the subject of recent Council of Australian Government
(COAG) reforms. The reforms aimed to enhance public accountability for
service delivery by clarifying roles and responsibilities between levels of
government and improving collaboration. Rather than dictating how things
should be done, the new framework focuses on the achievement of mutually
agreed outputs and outcomes, providing the states and territories with
increased flexibility in the way they deliver services to the Australian people.

National Partnership Agreements are one element in this. These generally involve:

1. Negotiation between Commonwealth and States of a framework agreement setting out objectives and broad approaches.
2. Development of an agreed implementation plan setting what will be done and how, along with reporting arrangements on progress.
3. Both agreements and implementation plans contain provisions for variation.  

On the surface, this all seems very sensible. However, problems can arise where:

1. The Commonwealth as funder actually dictates the detail of what is to be included in the partnership on a like-it or lump-it basis. The problem is compounded where terms dictated ignore regional diversity, with a one size fits all approach. The only thing that the states can do in these cases is to try to negotiate on points of detail.
2. The Commonwealth essentially dictates what must go into implementation plans. These may include, for example, requirements that require Commonwealth approval of particular and detailed expenditure plans before any action can commence. They may also include a plethora of requirements and sub-objectives.
3. The Commonwealth is inflexible in implementation.

Problems are compounded because all states and territories have their own rules and accountabilities regarding expenditure that must be complied with, including formal legal requirements. These National Partnerships often involve very large sums of money.  The central coordinating agencies in the states and territories are concerned not just with efficiency and probity issues, but also with the management of cash flows.

Very real problems can be created for things such as state budget processes when the timing and scale of payments from the Commonwealth is uncertain. Further, coordinating agencies are concerned about ancillary costs that can arise in implementation that are not covered and which can affect other parts of state budgets.

If we now look at the Northern Territory report into indigenous housing, we find that program delivery there suffered from, among other things, from a multiplicity of sometimes conflicting and unranked objectives with over-complicated decision structures including no less than six decision layers.

Turning to the school building program, the ANAO summarised some of its criticisms this way:

The program design and funding variation process, which is focussed at project/school and ties funding to individual projects within schools, has not allowed the states to manage BER at a program level. The complex and constantly amended funding variation process has not enabled states to readily transfer funds between schools in order to achieve the agreed outcomes. The variation process and adherence to a narrow definition of approved project is considered increased input control, which is at odds with the principles of the IGA (Inter Governmental Agreement) to focus on outcomes.

Without going into the full detail in the report, some of the problems that arose can be summarised this way:

1. The use of bands based on student numbers to determine project size created inequities between schools at the margin (a shift of a few pupils could have dramatic funding impacts), as well as an incentive to manipulate student numbers.
2. The way that funding was announced meant that was meant to be a maximum spend per school actually became a target spend.
3. The requirement that the Commonwealth approve spend on a school-by-school, project-by-project basis, together with over-complicated objectives and reporting requirements, increased administrative load and reduced flexibility. This was further complicated by a ruling that spend below maximum on particular school projects could not be transferred to other projects in the same jurisdiction but must be returned to the Commonwealth. School systems had no flexibility in adjusting spend between schools to achieve maximum value.
4. Conflict arose between the Commonwealth's approach and the centralised approaches to public education in the various states. This was complicated by Commonwealth rules that created tensions between principals and their state employers.
5. Budget confusions arose. In preparing costings, the Commonwealth Finance Department worked on the basis that spend would equal 90% of the maximum per school. This was interpreted by the Department as 90% of schools participating. Since the Department's aim was 100% participation, while the maximum spend had actually become target, it quickly became clear that spend would be greater than budget. This led to financial adjustments, including transfer of funds from social housing, to try to keep spend within aggregate budget approvals.
6. Given the size of the program, variations in Commonwealth payments created cash flow problems in the states. While these were resolved, it cannot have helped state budgeting.
7. In addition to difficulties associated with transfers of money between school projects, initial Commonwealth inflexibility created on-ground difficulties because of varying on-ground conditions. The intent was that all schools and areas should benefit from stimulus spend and in broadly the same time horizon. However, the actual impact of the downturn was quite variable across Australia, while there were also considerable variations in the available supply of skilled labour.
8. Not only were reporting requirements overly complicated, but the data provided inevitable contained so many variations and was based on so many assumptions as to be unusable in measuring progress. 

I said at the outset that the report was unlikely to provide the type of smoking gun desired by the opposition. Despite building delays of the type I forecast at the time, the report concludes that the program did broadly meet the stimulus objectives. Further, in criticising both the Department and other Commonwealth bodies involved, the ANOA explicitly recognised the size of the program and the difficulties involved. The analysis makes it clear that the Department did try within its limits to be flexible and responsive.

  To my mind, and putting aside the inevitable problems always associated with the delivery of such a huge program, the problems that arose were due to the combination of failures in the way the way the program was specified in combination with the broader systemic features such as inflexibility, over-complication, over-specification and over-control that mark the general Rudd Government approach to public policy.

You can see why some of us are so cautious about things such as the Health proposals. Regardless of the general in-principle arguments involved, there has to be a question mark over the likely effectiveness of the proposals in the absence of a change in the Commonwealth Government's approach to public policy and administration.

Puzzles with the Henry Tax Review

You can find the full Henry Report here. The Government's promotional web site here.

At the moment, we are dealing with two very different things. The first is the Henry review itself, the second with things that the Government has accepted, rejected or left up in the air.

With taxation matters, the devil always lies in the detail. You also have to look very carefully at the language involved.

I simply don't have a view on much of this at the moment. My assessment of the Resource Rent tax as proposed strikes me as a bit gimmicky with a complicated and still unknown pattern of winners and losers. Further, I am not sure that the proposed Commonwealth investment of 40% in new mining infrastructure makes a lot of policy sense.

I am sure that details will change as consultation proceeds. I don't think that the use of the Government bond rate as a benchmark from which to calculate "super profits" is in any way sustainable, ignoring risk among other things.

We can be sure that the various interest groups will pick over the entrails. I will read with interest.   

Australian house prices rise further

While there is anecdotal evidence that the boil may be coming off, the rise in house prices in Australia has been quite remarkable by world standards.

This graph from the Australian Bureau Statistics shows the weighted quarterly average increase in house prices in Australia's capital cities.

You can see how prices came of the boil during the global financial crisis, only to start ramping up again. Average weighted prices in the March quarter 2010 were up no less than 20% from 12 months before.

The biggest increase came in Melbourne (27.7%), followed by Sydney (21%).

According to ABS, both the Melbourne and Sydney increases in the most recent quarter came especially at the high end of the marketplace.

ABS does not give non-metropolitan figures. However, while not rigorous, the numbers I have seen suggest significant rises in regional Australia as well.   

Non-tradable's and the Australian CPI

At 0.9% for the March quarter, 2.9% for the full year, the Consumer Price Index figures released today by the Australian Bureau of statistics were a little higher than forecasters had expected.

One thing that interested me was the difference in price performance between the traded and non-traded sectors.

The tradable component where prices are largely set on the world market makes up around 42% of the CPI basket. Prices here rose by 0.2% in the March quarter, up 1.1% over the year. This compares to 1.4% in the year ending in the December quarter 2009.

By contrast, the non-tradable component (58% of the CPI basket) rose by 1.5% in the March quarter, up 4.2% over the year. The equivalent figure for the year ending in the December quarter 2009 was 2.6%.

As you might expect given Australia's relatively good growth, the price pressures are presently on the non-traded side. This can be expected to continue.

Leaving aside issues associated with the definition of core inflation, the CPI is now very close to the Australian Reserve Bank's target range of 2-3%, above it in some capital cities and in non-tradable goods.

The Bank may or may not raise interest rates at its next meeting, but the raw numbers do suggest that Australia is facing inflationary pressures. The real sleeper is the tradable side since world economic growth is accelerating.            

Hawke report into Australia's home insulation program

One of the problems that the Rudd Government has faced in Australia, one that I have commented on before, is simply that of delivery. In this context, the troubled home insulation program has finally been axed. 

The Australian has provided an on-line copy of the Hawke report into the program. The report is worth a browse for those interested in the practical processes involved in program delivery. 

Conundrums in the Australian economy

The release of the minutes of the Reserve Bank Board monetary policy meeting of 2 February 2010 contained no real surprises.

In terms of the economic outlook, the global economy was strengthening, if with some downside risks; underling Australian inflation was declining; while the medium term outlook for the Australian economy was good, the immediate picture was still mixed. In these circumstances, the Board felt under no immediate pressure to shift the official cash rate.

While the minutes are interesting and provide a useful summary of the current economic position, the 16 February speech by the Bank's Guy Debelle (Assistant Governor (Financial Markets)) is far more interesting.

In that speech Guy Debelle discusses the unfolding of the global financial crisis and the Bank's response. Certainly the Bank had a far easier time of it than its overseas counterparts simply because the crisis was less here. However, it also appears that the Bank's operating mechanisms - its experience, policies and processes - proved to be more robust. Crisis it may have been, but it could still be managed.

I found the description quite fascinating.

Looking to the longer term, Debelle made a clear distinction between the financial markets in the major Northern Hemisphere economies and those in Asia. To his mind, To his mind, there was still some distance to go before the effects of the asset bubble (my words) were fully unwound. This was likely to affect the US financial system outside the major banks. By contrast, Asian was expanding faster, while bank balance sheets were better there.

This brings me to the first conundrum in the Australian economy, China.

Reading Michael Pettis, I get the strong impression that Chinese banks are by no means as secure as Guy Debelle's analysis would suggest. The huge expansion in bank credit has been associated with something of an asset bubble, especially in real estate much loved by so many Chinese. The numbers I have seen quoted are staggering.

I just don't feel confident about China.

The second conundrum lies in the Australian data itself. Some economic data is good, some not. What does seem clear, but subject to China, is that a two stream economy is re-emerging again.