Tuesday, March 31, 2009

On-ground effects of the Australian Government's stimulation packages - March 2009

It has taken me much longer than expected to start catching up from the effects of the move. I say start, because I am still running behind. I will continue the series I started on Problems with modern mechanistic management - introduction, but I wanted to do a catch-up post first on the on-ground effects of the Rudd Government's various stimulus packages as I see them working their way through.

As you might expect, the effects have been variable. We talk about the Australian or US economies as though they actually exist. In one sense they do of course, but they are also averages concealing great local or regional variation.

For other reasons, I spend a fair bit of time monitoring the media and especially the press in regional Australia. At this level it is much easier to see specific impacts because they attract reporting in a way not possible in the metropolitan media.

The comments that follow are necessarily impressionistic. There are no statistics to measure the things that I am talking about.

As you might expect to begin with, the effects of the economic downturn itself vary greatly at local level. Some regional centres dependent on mining or with significant local manufacturing have been hit quite hard. In other less trade exposed centres, the recession has had little impact. Whereas at a macro level, people are worried about unemployment, the problem for these centres remains attracting the skilled labour they need.

It is often forgotten in Australia that most of our booms are linked in some way to real estate and construction booms in the major cities. Downturns are actually quite helpful to some other parts of the country because it makes it easier to attract staff.

The higher first home buyers grant on existing homes has created something of a mini-real estate boom in some of the larger regional centres, with quite noticeable increases in sales and in prices at the lower end of the market. Because regional real estate prices are lower than city prices making it easier to buy, demand has spilled over into mid-priced homes.

The direct payments made to pensioners and others just before Christmas had quite a pronounced effect on retail sales.

On-ground effects here were always going to be variable because the proportion of recipients varies between communities. Many regional centres have a higher proportion of people on Family Tax Benefits as well as an older population. Some of these centres saw a very large boost to sales, with clear record trading.

It was always going to be the case that capital spend items would take longer than the Federal Government allowed. The grants to local councils were the first to  have an impact simply because the councils were better geared for action. Local newspapers have been full of stories about small individual projects.

This appears to have cushioned another effect of the global financial crisis that I was insufficiently aware of. Many local councils invested reserve funds in triple A rated instruments such as CDOs that proved to be far from triple A. Armidale City Council, for example, faces a financial loss of up to $A12 million, a very large sum given the council's size.

I haven't seen this much reported, but on a surface skim it appears that the consequent legal class actions - including actions against the ratings agencies -are likely to be quite significant.

One of the most interesting things is the way in which the initiatives in the social housing area have started to feed through.

At least in NSW, the local papers have been full of Housing NSW advertisements seeking, among other things, DA (Development Approved) medium density sites. The intent here is to partner with local developers, including especially those who have been unable to find funding.

I have been meaning to do a macro assessment of this in terms of scale relative to the size of the sector. Looking at the micro-level, I think that one effect will be to empty the existing development pipe-line.

Replicated across the country, this is likely to draw new development planning forward. The key constraint is likely to be - as it was before - the availability of suitable land.

Now add in the initiatives intended to address the maintenance backlog in social housing. This uses the same trade skills as new construction. Again, the local affects are likely to be significant in many regional centres that have significant existing new finance commitments - dwellingssocial housing stocks.

Turning again to the macro level, leading indicators such as new dwelling finance commitments (see chart) are now showing a clear upward trend.

All this means that the residential building sector at least is now showing all the signs of a very substantial surge.

This will still take time to feed through into increased construction activity.

I am not absolutely sure of the lags here. On the surface, we are likely to see a steady ramp-up in building activity in the second half of the 2009, with something of a surge in 2010.  

Sunday, March 08, 2009

Problems with modern mechanistic management - introduction

The Australian state of Queensland is presently in the middle of an election. Here I heard the leader of the Liberal National Party opposition say that he expected to be able to help pay for his election promises by enforcing a "productivity dividend" on the Queensland public sector.

This is exactly the same approach that Prime Minister Rudd announced before the last Federal election and then enforced. Now the Commonwealth is struggling to deliver on its programs and policies.

NSW, too, has the approach in place, in this case further compounded by a freeze on new appointments. Again, the State is struggling to deliver.

The concept of a productivity or efficiency dividend sounds so sensible.

Competition improves efficiency. The public sector is not subject to competition, therefore use small rolling budget cuts on agencies to provide a proxy for the type of efficiency gains achieved through competition.

The problem is that it does not work in the long term. It is in fact an example of what I call mechanistic management.

As a bit of a break from economics, I plan to explore this issue over coming posts. You will still get some economics, but I feel the need for change.

Wednesday, March 04, 2009

December quarter 08 - Australia's real net disposable income increases by 1%

I quote from the Reserve Bank of Australia:

A broader measure of change in national economic well-being is Real net national disposable income. This measure adjusts the volume measure of GDP for the Terms of trade effect, Real net incomes from overseas and Consumption of fixed capital (see Glossary for definitions). The graph below provides a comparison of quarterly movements in trend GDP (volume measure) and Real net national disposable income. During the December quarter, trend Real net national disposable income increased by 1.0%, with growth over the past 4 quarters at 6.4% compared to 0.6% for GDP.

Real net disposable income December quarter 08

So Australians have more money even if GDP as conventionally defined has fallen. My my.

I do not have time tonight to do a proper analysis of the national accounts. I will try to do so tomorrow.

Tuesday, March 03, 2009

Australia's fascinating economy

What a fascinating beast this Australian economy is just at present. It has also been fun watching commentators twist themselves in all directions as they try to adjust their forecasts to apparently diverging statistics.

Economic data released yesterday (Monday 2 March) led to gloom and doom, with Australian Treasurer Wayne Swan suggesting that last night that the global slowdown would have a “dramatic impact” on the local economy, with commentators downgrading their forecasts. Then today with good data, many commentators hastily revised their forecasts again.

Today also the Australian Reserve Bank decided not to reduce interest rates, suggesting that further monetary stimulus was not necessary. Yet the Government is still talking gloom. As I write, Mr Rudd is revealing his seven principles for fixing the global economy – I lost count around eight at the use of the words “toxic assets”. We appear to have moved from war to medical analogies; the virus of toxic assets must be fixed.

I know that I should not be enjoying this so much, but I cannot help myself. I make no pretence of understanding short term movements. What I have tried to do is to establish a longer term position against which I can test immediate movements.

I do not have time today to look properly at the numbers. However, nothing that I have seen causes me in any way to switch my previous position. To my mind, the real crunch point is still some months away.

Monday, March 02, 2009

On-line problems

I have been effectively off-line because of a house move. Even now, the internet connections are not fully back in the home office. All very frustrating. It will still be a little while before I can post properly again.

In my last post A very odd recession I spoke of the divergences between Australian and international economic performance, of the gap between the negative official commentary and the apparent picture of domestic economic activity revealed by the statistics.

Statistical data released since I wrote including ABS capital expenditure data has continued to surprise commentators with its strength.

This week will be a big one from a data viewpoint, with a whole series of releases including balance of payments data, January retail sales figures and the December national accounts estimates. For the benefit of international readers, the ABS data goes on line at 11.30 am in the morning Australian Eastern Daylight Saving time.