January front page - a data month

Earlier in January in Has Access Economics done Australia a grave disservice? - 1 I started an analysis of Australian economic performance. Events since then have intervened.

I remain of the view that Access did do us a grave disservice despite the gloomy discussion since. However, I have felt the need to do a more detailed check of data before writing any more. It is absolutely impossible to rely on reporting in the current climate.

I am keeping this post as the front page until the end of January. I am also going to bring up a series of past-dated posts based on the date of events. I feel the need to create a time based record to provide a proper base for subsequent analysis.

I don't know about you, but I get very confused, finding it difficult to maintain any form of stable equilibrium in the face of constant variability. I will provide summary details of the posts as they come up on this page.

Has Access Economics done Australia a grave disservice? - 1

Early this morning in a post on my personal blog, Is the Access Economics report right?, I noted the language used in the latest Access Economics report on the Australian economy.

I have a high opinion of Access. As I said in this morning's post, they have a better feel for the numbers. But this time as I listened to or read the coverage during the day I decided that they have really gone over the top in crafting their language to get major media impact. 

So let's look at some of the data. Because this is an opinion piece, I am not giving all the links. I am sure that my errors will be corrected.

The firm (Access Economics) says the Government's cash handouts to households will not be enough to save the retail sector from a bleak Christmas. ABC story 15 December 2008.

Back in December, Access suggested that this Christmas's retail sales would be bleak. They were not, going up slightly overall. In some parts of the country, Armidale is an example, retail sales set new records.

So far so good.

Let's turn to employment. This is a lagging indicator in that firms hang onto staff in the first instance, then let them go later if market conditions continue to worsen

The December stats from ABS essentially showed a steady unemployment rate. However, this average concealed a significant deterioration in that full time employment fell by almost 44,000, while the participation rate declined slightly.

No surprises here. We already knew job ads had declined sharply. But let's keep things in perspective. At a time of global crash it is a quite remarkable feat to hold the raw number steady.

So far so good.

Bank bad debts are rising, but our banks remain sound. The big banks have used the Government guarantee to raise something like $A60 billion on global markets. No major liquidity problem here.

Of greater interest, the regional banks who were expected to be the main users of the guarantee have made almost no use of it. They have not needed to because the rise in retail - mum and dad - deposits has been adequate to fund their lending.

In another qualitative sign,the banks are trying to sell loans on TV. Some at least want to lend.

So far so good.

Home building approvals, a leading indicator, have been in decline for twelve months, down 26 per cent. We knew that this sector was sick. No surprises there.

So let's look at the lending figures, an even more leading indicator. The November figures for housing finance for owner occupies dwellings showed an increase over the previous month of 0.4% in trend terms, 1.4% in seasonally adjusted terms.

Lending for personal consumption was down, and a bloody good thing too.

Commercial finance was down 1.6% in trend terms, a large 10.4% seasonally adjusted. No real surprises here. Business is reluctant to borrow just at present.

Still, in all, so far so good.

The Access Report apparently predicted that the current account deficit would rise from $A65 billion this financial year to $A100 billion next year as exports fell faster than imports.

Perhaps.

Over the second half of calendar 2008, the balance on goods and services actually moved from a long term deficit to a surplus, the first for some time, providing us with a buffer.

If the newspaper reports are correct, then the Access numbers suggest that we will move from the current surplus to an average deficit of over $A8 billion per month. Yes, our commodity exports are falling, but $8 billion?

The most recent trade stats on merchandise imports show a 4% fall in original terms in December. We will just have to wait to see.

I hesitate to say so far so good. Certainly I thought that the previous turn-round was was much better  than so far so good.      

I don't have time to continue tonight. I will try to finish this post tomorrow.    

Sales of Australian wine and brandy November 2008

The Australian Bureau of Statistics has released details of Australian wine sales for November.

The trend estimate for domestic sales of Australian produced wine by volume was 34.7 million litres in November 2008, a decrease of 0.5% from October 2008, down 3.3% from November 2007.

The chart shows domestic sales. Down, but relatively stable. 

The export position is a little different. Australia is now a major wine exporter. The chart below shows our wine exports by volume. You can see the huge increase over the last decade, the sharp down turn in recent times.nt times.

The fall in the Australian dollar means an increase in the price of local imported wine, although the price of my Spanish tipple has yet to shift. However, falling export demand means that we Australian wine drinkers are going to get a local bonus in terms of lower prices.

Australia's trade performance - November 2008

In Australia's improving trade performance - October 2008 statistics I commented on the remarkable turn-round in Australia's trade position, a move from deficit to surplus, at just the time Australia needed it.

The Australian Bureau of Statistics has just released new trade figures. How did Australia go?

The table below sets out seasonally adjusted exports and imports in $A million.

If you compare the numbers with the previous table you will see that they vary. This happens because of subsequent adjustments by ABS. I must say that the number of variations surprised me.

Month	Exports	Imports	Balance
2007
September	17,765	19,919	-2,154
October	17,251	20,268	-3,017
November	18,318	20,569	-2,251
December	18,822	20,646	-1,828
2008
January	19,514	21,795	-2,282
February	18,742	21,819	-3,076
March	19,960	22,153	-2,493
April	21,659	21,980	-321
May	22,224	23,249	-1,025
June	23,320	23,099	220
July	23,556	23,965	-409
August	24,736	23,375	1,361
September	26,105	24,994	1,111
October	27,934	24,974	2,960
November	26,932	25,484	1,448

The pattern is similar to that outlined in my last report, with the balance of trade going into surplus at just the time we needed it to do so. That said, and as you might expect, the seasonally adjusted figures do show a weakening in Australia's trade position.

Imports continued to rise, while exports declined.

As an indicator of the effect of the global downturn, if we look at the original data, exports of non-agglomerated iron ore declined by 24% in volume terms, while prices were down 3%. Exports of metallurgical coal decreased 15% by volume, although here prices were up by 8%.

The following table shows Australia's trade performance in financial year terms, original data. Figures are in $ million. 

Year	Exports	imports	Balance
2005-06	196,274	210,794	-14,520
2006-07	215,696	228,452	-12,757
2007-08	234,418	255,372	-20,954

You can see that we have had a fair size deficit. This compares with a surplus in the first five months of this financial year of $4,590 million. A substantial turn around.

The effect of the global downturn on our balance of trade position depends upon the net effect on imports and exports.

As you can see from the iron ore and coal examples, export volumes have already dropped sharply. This is reflected in mining lay-offs. We can also expect price falls.

On the other side of the ledger, we can also expect some fall in imports.  

It all depends upon the scale of the two effects taking exchange rate movements into account.

Take the 07-08 figures and assume that the dollar value of exports drops by a third. The trade deficit would blow out by $78 billion. This would be unsustainable. The exchange rate would decline to the point that exports and imports were once again in something approaching balance.  

Australian building approvals November 2008

ABS statistics released today suggest that In November the total number of dwellings approved in Australia fell by 4.2 per cent as compared to October in trend terms. More importantly, the total number of dwelling units approved was down 26.1 from November 2007.

The chart shows the pattern in both trend and seasonally adjusted terms.

The important point to note is that the downward trend was in place long before the global financial crisis.

I make this point because of the tendency to blame every piece of bad economic data on the global crisis.  

Australian retail sales - November 2008

According to the Australian Bureau of Statistics, Australian retail sales in November (trend estimates) were $18.4231 billion, up 0.1% on the previous month, up 1.9% on November 2007.

The attached graph shows that the rate of growth in retail sales weakened steadily over 2007-2008 before recovering somewhat.

INDUSTRY TRENDS

In terms of the detail, ABS notes that the food retailing industry had a period of weak growth from November 2007 through to April 2008, followed by seven months of moderate or strong growth. Other retailing had four months of moderate trend growth. All other industries have had a decline in the trend estimate for at least three months with:

• Department stores and Clothing and soft good retailing, three months of decline in the trend estimate preceded by four months of either no change or weak growth in the trend estimate
• Household good retailing, six months of decline in the trend estimate preceded by three months of weak growth in the trend estimate
• Cafes, restaurants and takeaway food services, a decline in the trend estimate for 13 months.

You can see why firms like department store David Jones have experienced a degree of trouble.

STATE TRENDS

The trend estimate has been in decline in New South Wales for ten months. No surprise there.

Western Australia had a decline in the trend estimate in November 2008 after no change in the trend estimate in October preceded by two months of weak trend growth. Queensland, South Australia and Tasmania have had three, two and three months of weak trend growth respectively. Victoria (five months) and the Australian Capital Territory (three months) have had moderate growth. The Northern Territory has had seven months of strong growth.

Happy Christmas to all

As I write, my last post was Economic implications of the Australian Government's Nation Building package on 14 December. I have in fact several part completed posts, so don't be surprised if several posts suddenly appear dated prior to this post! Here I am going to take advantage of the Christmas break to complete some writing.

This blog began simply as a way of recording some of the writing that I and other Ndarala colleagues had been doing on management issues. More recently, I have been using it more as a place for discussion on economics related issues.

I have really enjoyed this, although I do not want to lose total sight of the management content. The change in focus has also led to a sharp increase in the number of visitors. This obviously pleases me.

To all my readers of all faiths and none, I wish you a happy and peaceful Christmas.

Economic implications of the Australian Government's Nation Building package

This photo shows coal trains passing in the Hunter Valley.

For the benefit of international readers, the Hunter Valley lies north of Sydney and is one of Australia's major coal provinces. If my memory serves me correctly, it is now the largest coal producing area in the world.

Introduction

On Friday 12 December 2008, the Australian Government announced the latest economic stimulus measure, a $A4.7 billion national building package. I will discuss this in a moment. However, first I wanted to summarise the key steps that the Australian Government has taken so far. I don't know about you, but I am starting to lose track.

To do this, and despite my complaints about dreaded text tables, the following table summarises some of the measures.

Date	Measure	Comment
12 October	Government guarantees all bank deposits plus new international borrowings by Australian banks to preserve liquidity, overcome loss of confidence, protect the bank's international competitive position	Achieved its objective at one level, but also triggered a run on mortgage funds
14 October	$10.4 billion Economic Security Strategy with two key elements, one-off payments to certain social security recipients from 8 December to boost demand plus increased first home buyers' grants for a defined period intended to increase home building over 08-09 and especially 09-10.	With the cheques just going out now, too early to judge impact.
10 November	Green car plan - $6.2 billion plan to make the automotive industry more economically and environmentally sustainable by 2020.	While the Government is now including this in its list of stimulus measures, it actually reflects different policy drivers.
18 November	$300 million to fund immediate new capital spending by local Government, with funds to be committed by end June 2009.	A broad based measure designed to have impact in the second half of 08-09 and 09-10.
29 November	COAG package - $15.1 billion to stimulate the economy and drive significant reform in health, education, housing, business deregulation, and closing the indigenous life expectancy gap. Claimed to create 133,000 jobs.	This measure replaces existing measures and is not all new spend. The economic stimulus component lies in a weighting of spend towards the front end to achieve a stimulus affect.
12 December	$4.7 billion nation building package to fund capital projects and encourage business investment.	This fund includes  a mix of new spend plus planned spend brought forward in time.

Despite the problems I outlined in Australia's economic stimulus packages - the practical difficulties in cranking up spend, and despite too the inevitable degree of double counting and spin in some of the wording, there can be no doubt that the Government is trying to boost economic activity especially in 08-09 and 09-10.

The new measures

Those interested in the detail of the latest measures can find them here. Ministerial statements can be found here and here.

I noted, first, that the Government is including specific job creation estimates for this and previous measures:

• 75,000 jobs through the Economic Security Strategy
• 133,000 jobs through the COAG Package
• plus 32,000 jobs through the latest nation building package.

The Australian workforce is about 11.2 million, so we are looking at projected job creation of a bit over 2 per cent of the current workforce. In theory, this should more or less off-set the economic down turn, if with a lag.

The second thing I noted about the latest measures is that the projected $4.7 billion spend is made up of:

• $2.5 billion in new planned spend plus $2.2 billion in planned spend brought forward. The significance of the second is that the money is already allocated; spend will go up now, down later on.
• $1.5 billion to be spent in the current financial year, $2.7 billion in 09-10, $500 million in 10-11. Again, we have the biggest impact in 09-10. The Government projects that this measure will add between 1/4 and 1/2 per cent to GDP in that year.

  The proposed spend incorporates a number of very different things

Rail: $1.2 billion to fund 17 railway infrastructure projects. Of this, $580 million will be spent on Hunter Valley rail upgrades, increasing coal export capacity from 97 to 200 million tonnes per annum.

I blinked at this, because the big infrastructure bottleneck at the moment is the port itself, with coal ships often lined up waiting. In April 2007, for example, there were no less than 72 coal ships waiting to enter the port. Presumably, this will be sorted out in future spend.

Other rail spend is designed to remove bottlenecks on the major rail trunk routes between capital cities.

Road: $771 million will be invested in road projects, almost completely made up of accelerated spend on existing projects.

Kimberley development: $195 million has been set aside to fund irrigation and social infrastructure around Kununurra in the Kimberleys in WA.

Education infrastructure: $1.6 billion has been set aside for education. Of this, $581 million will go to fund eleven projects put forward by metro universities, with a further $1 billion to fund teaching and learning capital in TAFEs and universities.

In addition to this planned infrastructure spend, there are two further business stimulation measures.

Pay as You Go payments by small businesses for the 08-09 year will be deferred, with a 20 per cent deferral in the payment due for the December quarter. This is essentially a cosmetic measure providing a short term benefit of $440 million.

More importantly, there will a short term investment allowance of 10 per cent on capital investment over $10,000 in tangible depreciating assets by business in the period up to end June 2009. This measure directly targets business investment at an estimated cost to revenue of $1.6 billion. 

Comment

In announcing the new measures, the Government stated that it expected the budget to remain in surplus. We must be getting quite close to the line here, given previous announcements.

The infrastructure announcements strike me as generally sensible because they should yield a direct economic pay-back over and beyond the immediate stimulus effect.

While the part deferral of PAYG payments will yield a short term cash flow benefit, I do not think that this is of any real economic significance. However, the new investment allowance is of more importance.

The problem with this type of measure is that it yields a wind-fall gain to businesses that would have invested anyway. This has to be offset against the gains in investment flowing from the stimulus. That said, the measure does directly target one of the main economic drivers, business investment.

I do not have access to Treasury's econometric model. I would be fascinated to see projections as to how the various bits fit together in economic terms. Without this, it is hard to make sensible judgements as to collective impacts.

In all this, I come back to two key points.

The first is that we remain in a strong position simply because the budget position has been so sound. So long as any Government measures do not create a structural deficit, there remains considerable scope to expand Government spending.

There is no exact science in economic policy in circumstances such as this. To a degree, it comes back to trying things to see what might work.

The second is the continuing importance of the balance of payments. If the stimulatory measures create a serious deficit here, then stimulatory policy will be constrained. Fortunately, and as I argued in Australia's improving trade performance - October 2008 statistics, our position here is quite good.      

Australia's economic stimulus packages - the practical difficulties in cranking up spend

One of the interesting side-effects of the various Rudd Government measures intended to stimulate the economy is the delivery pressures created.

In recent years, Australia's public sector has been under constant pressure to do more with less. Now the funding taps have been turned on, with pressure to spend in the 08-09 and especially 09-10 financial years for counter cyclical purposes.

This pressure flows from Canberra down through the COAG (Council of Australian Governments) process to individual state agencies. Throughout Australia, thousands of public servants are working on spend proposals, negotiating supporting arrangements with the Commonwealth, developing implementation plans.

From a public service perspective, there is a great feeling of liberation to know that you can now do some of those things that were clearly necessary but were simply out of court because of lack of funding. However, there is a very real problem here.

There is absolutely no point in developing plans when you know that those plans cannot be implemented. Here one side-effect of the past budget constraints, the need to do more with less, is that the development pipeline has thinned over time. Now when we want to spend, we are actually starting from scratch in many cases.

Inevitably, there will be some waste. By this I do not mean that project spend itself will be inefficient in a financial sense, although this may occur. Rather, that our lack of forward planning means that we will not get the best results from the spend in a longer term economic sense.       

Australia's improving trade performance - October 2008 statistics

In the midst of all the economic turmoil around us, I have been watching the trade numbers especially closely.

In recent years, the balance on goods and services (what Australia sells internationally less what the country buys) has been negative. This has been funded by private overseas borrowings, creating a channel down which the effects of the US sub-prime crisis flowed.

The most recent trade statistics from the Australian Bureau of Statistics show a very important turn-around in this position. In simple trade terms, the country moved from a net consumer to net saver at just the right time, thus cushioning the effects of the global financial crisis.

We can see this in the table below which shows exports, imports and the balance on goods and services, using seasonally adjusted data. All figures are in $AM.

Like all statistics, care must be exercised in drawing detailed conclusions without discussing the underlying basis of the statistics themselves. However, we draw some general conclusions without getting too bogged down.

Month	Exports	Imports	Balance
2007
August	18,599	-20,488	-1,873
September	17,711	-19,920	-2,209
October	17,248	-20,207	-2,960
November	18,340	-20,563	-2,224
December	18,807	-20,644	-1,838
2008
January	19,476	-21,747	-2,271
February	18,741	-21,766	-3,029
March	19,641	-22,136	-2,495
April	21,628	-21,909	-381
May	22,243	-23,215	-981
June	23,262	-23,039	222
July	23,475	-23,969	-494
August	24,773	-23,447	1,327
September	26,378	-25,123	1,254
October	28,141	-25,189	2,952

Source. Australian Bureau of Statistics International Trade in Goods and Services Australia, October 2008, Catalogue 5368.0 

Looking at the table, you can see the pattern of significant negative balances in the early period. Had we been in this position when the global financial crisis struck, we would have been in a great deal more trouble. Instead, the balance went into surplus at just the time we needed it to do so.

Expressed in Australian dollar terms, we continued to increase imports. However, this was more than offset by increased exports in Australian dollar terms. This meant that in the critical months August through October Australia generated a cumulative surplus of just over $A5.5 billion.

These are Australian dollar figures.

If you look at the September and October figures, you can see a sharp jump in both imports and exports. The Australian dollar depreciated sharply during this period against the US dollar, increasing both export and import prices in local currency terms. This was especially pronounced on the export side since 80% of Australian exports are sold in US dollars.

In effect, the global currency traders who dumped the Australian dollar delivered a net benefit to the country in trade terms. This could have been disastrous had it destroyed the Australian dollar market. As it was, the Australian Reserve Bank was forced to intervene several times, buying Australian dollars to maintain liquidity.

Again, the Bank's ability to do this was enhanced by the improvements in the balance of trade on good and services.