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.

Management Perspectives merges with Managing the Professional Services Firm

Note to readers: I have left this post up for reference purposes, but posting on this blog has resumed!

I have been mulling over how best to maintain my professional blogging. I have found it increasingly difficult to maintain two professional blogs with any semblance of regular posting.

After a lot of thought, I have decided to merge this blog with Managing the Professional Services Firm.

The two blogs were intended to serve two different purposes, one a specialist blog, this one with a broader management and economics focus. Given that I can't do both, I have decided to broaden my professional services blog. I hope that this will add interest without completely losing the professional services focus.
Feel free to visit.

Problems with maintenance

I had hoped that Paul Barratt as a former head of the Australian Department of Defence would comment on this one. However, while he has tweeted on it, he has so far not said anything substantive.

The Australian Navy faces a problem, quite a large one. Maintenance on its main transport ships was so neglected that it is now too expensive to fix them, so that they have to be taken out of service. While the Minister is, rightly, blaming the Defence organisation, the Navy's problems are a symptom of a bigger issue.

Let me illustrate with two Australian examples.

When funds for social housing were reduced, Housing NSW diverted funds from maintenance to new supply. That was fine, it maintained its performance measures for new housing stock. Then, suddenly, the maintenance backlog go so large and so urgent that the Department had to seek special funding.

Or take the University of New England. There funding cut-backs led the University to divert money from building maintenance to other activities. The university now faces a a huge bill for back maintenance for its residential colleges that it has no way of funding.

These are public sector examples, but I am sure that you can think of private sector equivalents. The electricity industry comes to mind.   

As managers at whatever level, we all face immediate short term performance demands. We also face budget constraints and cut backs. The problem with periodic maintenance is that is is one of those areas that is easy to cut back, to defer to meet an immediate need. Gain now, pay later.

I mention this one now because it seems to have become something of a pattern over the last ten years.

Changing hats and looking at it from the perspective of an investor whether private or business, it creates another uncertainty in judging immediate business performance that has to be properly investigated.

Google targets Australian web service providers

I see from IT Wire that Google Australia is offering free training in its products and free AdWords advertising to companies and individuals that offer web services to SMBs in a bid to get them promoting Google's offerings to their customers. I quote:

In a blog posting, product marketing manager, Richard Flanagan, said: "If you're a webmaster, digital agency, freelancer, IT consultant, or provide any other web services to Australian small businesses, you can apply to join the program starting today.

I am a bit surprised that Google hasn't tried this before. The web has become a very crowded place. While Google dominates the search marketplace in Australia, the range of competitor offerings on different platforms grows all the time. Facebook is an obvious example.

Back in January 2008 in Google's growing market share I made a passing reference to Google's business model, including the way that Ad Sense arrangements provided a pool of working capital. I have a strong feeling that Google's revenue from Ad Sense has been under a degree of pressure.

Blog performance November 2010

The attached graphic shows visitors (yellow) and page views ) yellow plus red) for the year to the end of November.

Over the last month, the most popular posts were:

• The Importance of Demography and Demographic Change - update 84 page views
• Slow posting 39 page views
• Economic implications of the Australian Government's Nation Building package 27 page views
• Hilary Clinton and web 2.0 24 page views
• Digital Intelligence 20 page views
• Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction 18 page views
• Common Management Problems Series 1 - managing up 16 page views
• A thought for Andrew Laming  14 page views
• A continued apology for slow posting 14 page views
• Paul Kelly's The Hawke Ascendancy 14 page views

A thought for Andrew Laming

Andrew Laming is the LNP member for Bowman in the Australian Parliament. Checking my stats, I found a visitor from Andrew's site. Checking, I found that Andrew had listed one of my posts, The Rudd Stimulus Package - Andrew Laming's view, under the In the Press segment on his web site.

I was very pleased. Let me explain why.

Back in February 2009, More economics 101 - the economics of Malcolm Turnbull looked at the differing economic approaches of the Rudd Government and the opposition. I said then that I was not especially interested in the differing rhetoric of the two sides, just trying to understand the variations in the economics.

This post drew a long and thoughtful comment from Andrew, so thoughtful that I actually turned it into a guest post without inserting my own views. This was the post listed above. Andrew then, rightfully, included it in his In the Press segment.

Now from my experience it is fairly unusual for a politician to treat a blog post sufficiently seriously to engage in discussion. As a blogger, I am obviously pleased. However, I also have a thought for Mr Laming.

He clearly has ideas. He is also prepared to support individual causes such as home birth. I wonder whether it might not be worth his while to do more writing.

I wonder whether Mr Laming is aware of the case of the NSW Parliamentarian Davis (Bill) Hughes. First as a back bencher and then as Leader of the NSW Country Party, he found it a little difficult to get publicity in the Sydney media. However, he did not respond with a multiplicity of press releases of that short form we love so well. Instead, he focused on more substantive material.

He did not get immediate publicity, indeed he wasn't seeking it. What he did do, was build a reputation with journalists as a thoughtful man who actually had something to say.

Later, when he wanted publicity he got it because he had built a reputation.

Just a thought.       

Australia capex stats September 2010

Yesterday the Australian Bureau of Statistics released Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2010.

This graph shows volume estimates. You can see how the numbers climbed and then dropped, only to recover.

On the surface, the expectations data also shows strength.

The release includes a range of other information that I am currently working through. However, to cut straight to the chase.

On the surface, the numbers are good. However, the growth appears to be driven pretty much just by WA.

More later.

State of the Blogosphere 2010 a note

Just a short note so that I can delete the email and not lose the link.

Technorati has release its annual survey of the blogosphere, in this case State of the Blogosphere 2010. From a quick scan, the survey's results contains a range of interesting material.