Tuesday, April 14, 2009

Management Perspectives - most popular posts 5

It has been several months since L last looked at the most popular posts on this blog.

Among my last 100 visitors, the most popular posts have been:

There was then a considerable gap, followed by five equal posts:

Interesting that only one of the many management posts I have written has been in the top group.

Friday, April 10, 2009

More Australian economic statistics - home finance, retail sales and employment data

On 8 April the Australian Bureau of Statistics released estimates of Australian housing finance for February 2009. The value of dwelling commitments rose by 1.7% in trend terms, 1.3% seasonally adjusted.

There was a fall in finance for investment properties, but this was more than offset by a solid rise in finance for owner occupied housing.

The influence of the first home buyers grant was clearly evident in the numbers. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments increased from 26.5% in January 2009 to 26.9% in February 2009, the highest proportion since the series commenced in 1991.

This fits with what I said in On-ground effects of the Australian Government's stimulation packages - March 2009, referring to the mini-boom in house prices at the lower end of the market.

Value of dwelling committments Feb 09 An important feature of the statistics was a solid increase in the number of loans for both new construction and the purchase of newly constructed homes.

The graph from ABS shows the value of new dwelling commitments. The significant decline as the economy turned down in the first part of 2008 has been replaced by a clear upward trend.

This trend is likely to continue until the end of June when the extra home buyers grant comes to an end.

I did not comment on the February retail sales figures. These were released on 1 April and showed a drop of 2% in seasonally adjusted terms. This was to be expected after the big increase flowing from the stimulus package cash payments.

The ABS release included a fascinating graph that drew this out in a rather dramatic way.

The graph on the right shows retail sales. You can clearly see the big increase in December, with the effect then tailing away.

There is still debate in Australia about the value of the stimulus package because so much went into savings. To my mind, that is no bad thing.Retail turnover February 09

Cheques from the next stimulus package are now in the mail, so to speak, with payments appearing in people's bank accounts. I don't expect this to have the same impact, in part because of the constant gloom reporting.

During the week the Australian Reserve Bank reduced the cash rate by a further 25 basis points to 3%. I had hoped that they would not.

Just at present reductions in official rates are not very effective because of a widening gap between the official rates and the banks' cost of funds, so official rate cuts are not necessarily passed on. Further, to my mind there is a strong case for greater stability in policy making. Governments including the Australian Government are a bit all over the place, driven by the latest data.

Finally on the statistics' front, the latest Australian employment statistics were released yesterday. As might have been expected, they showed some deterioration in employment conditions, with the unemployment rate in seasonally adjusted terms increasing from 5.2 to 5.7%. The participation rate remained the same, with a small increase in part time work more than offset by a fall in full time employment. 

I don't pay much attention to the monthly work force statistics because they are a lagging indicator. Certainly we still have some distance to go before we reach the levels set by the 1991 recession when unemployment peaked at over 10%.       

Wednesday, April 08, 2009

A further meander through recent economic developments April 09 - engineering construction, short term visitor movements

It is remarkably difficult at present to stand aside from the constant stream of comment and ever changing forecasts about the state of the economy. I try to adopt a longer term approach, but its quite hard.

I do wonder about the constantly updated national and international economic forecasts. Apart from anything else, there is always an optimism/pessimism problem. The forecasts have also become a factor in their own right because of the way they feed into expectations.

To start with a somewhat random update on the latest official statistics.

The value of Australian engineering construction activity for the December Engineering construction Dec Q 08 quarter 08 showed continued strong growth in both trend and seasonally adjusted terms, up more than 5% from the quarter before, well over 20% from the previous December quarter.

However, the value of work commenced in the December quarter at $A18.7 billion was down 17.5% from the September quarter 08.

The attached graph from the ABS shows trend estimates. You can see the way in which the long mining boom drove private sector activity. Now that has gone into reverse.

The thing to watch with these numbers is public sector activity.

Actions by Australian Governments to step up investment spend have still to flow through into increased activity. Government spend is up significantly in year on year terms - +24.3% in trend terms, just a little less than the private sector increase - but most of the measures are still in the final planning stages. There is likely to be a gap between the end of the private sector investment boom and further increases in Government activity.

Visitor arrivals short term Feb 09 The February statistics for short term overseas arrivals and departures were interesting. These figures are very variable, but do provide hints as ro activity.

In terms of arrivals, the side graph shows how short term visitor numbers have increased since October 2008 in both seasonally adjusted and trend terms and are now around the level they were in February 08.

Within the aggregate numbers, there have been very large falls in the number of Japanese and Korean visitors, about what you would expect given the economic position in both countries. However, these have been offset by a range of smaller increases including Chinese visitors.

Resident Departures short term Feb 09 The position is very different if we look at short term departures from Australia. If you look at the ABS graph here, you can see the drop in numbers over the second half of 2008. More Australians have chosen to stay at home.

In combination, there has been a fall in international movements. This is generally attributed to the international downturn. However, the numbers suggest that it is as much Australians' reaction to the downturn, rather than the downturn itself that, that has caused the fall.      

I am out of time this morning. I will continue my meander in my next post.

Saturday, April 04, 2009

A first meander through recent economic developments

The twists and turns associated with the global economic crisis remain fascinating. Perhaps the most interesting thing beyond the economics itself are all the by-plays and sometimes unexpected side-effects.    

This post is simply a meander through some of the things that I have noticed or that have amused me. As a meander, it's probably going to be a bit disconnected. Still, I hope that it will be of some interest.

In On-ground effects of the Australian Government's stimulation packages - March 2009, I noted the market impact of the increased first home-buyers grant on house prices at a regional level.  In an interesting article in today's Sydney Morning Herald, First-home rush keeps prices on boil, Elicia Murray, Ellie Harvey and Josephine Tovey report on similar effects in Australia's largest metropolitan marketplace.

Apart from continuing the apparent disconnect between Australian and broader global developments, this must be one of the few places in the world presently experiencing a mini-real estate boom, the current situation poses an interesting challenge to the Federal Government. Will the Government be forced to continue the measure beyond 1 July?

Like a fair few commentators, I expressed reservations when this measure was announced. The original introduction of the first home-buyers grant had a somewhat similar market impact - prices at the lower end of the market rose sharply and then stabilised at a higher level that took the grant into account. The effects were actually quite distorting, arguably disadvantaging lower income renters in particular.

This time the extra grant on the purchase of existing houses is time limited. The Government obviously hoped that this would stabilise house prices at a time when world news was dominated by crashes in asset prices. It may have got more than it bargained for. Economics 101 suggests that the present mini-bubble is likely to be followed by falls in house prices once the additional stimulus is withdrawn.

The case illustrates the difficulty Governments' face in crafting integrated measures in the face of lags and uncertainties.

Before going on, the Australian Government has created a web site to promote its economic stimulus package. Unfortunately it does not cover all the measures, so the best way to check back-details remains the Media Hub on the Prime Minister's web site.

The increased first home buyer arrangements were announced last October as part of the Economic Security Strategy. At the time, the focus was on an immediate response to the global financial crisis; the scale of the effects on the real economy were not then clear. Then as the crisis unfolded, a stream of new measures were announced.

The Government hoped that the various measures would work in an integrated way, cushioning the economy against immediate effects while allowing time for longer term measures to come into play.

It hasn't quite work this way. The flow-through into the Australian economy of the downturn was faster than expected. Then, for reasons that I have written about at length, the longer term measures have taken far longer to implement than the Government originally allowed.

The end result has been something of a disconnect between the measures. In this, the increased first home-buyers grant has actually become a bit of an orphan measure.

It addressed a problem (possible collapse in Australian asset prices) that, in retrospect, was not as great as the Government feared. Further, economic movements together with lags in other measures means that the impact of the end of the increased grant may stand out like a sore thumb.

There is another issue here.

The opposition's attacks on the Government's economic measures have centred especially on the increased debt burden that will remain as a legacy and have to be dealt with. While there is some truth in this, there is actually a much more significant problem that has already started to bite.

There was a very interesting article, unfortunately I did not keep the reference so cannot give proper credit, pointing to the impact of the various Australian Government treasury and finance departments. I thought that it was a very good article because it made a point that I had not thought about, but which rang very true from my own experience.

The point was a simple one. The various treasury departments accept short term deficits so long as the budget remains in balance in the long term, taking projected growth rates into account. Sounds simple, I can hear Australian readers saying Dur!, but it has important behavioural implications.

Quite simply, the knives are already out looking for places to cut spending to ensure budgets come back into balance. Here the current crisis provides an opportunity to do some pruning of things that would otherwise prove politically impossible.

We can see this in Treasury Secretary Ken Henry's speech yesterday foreshadowing changes to the welfare system. Among other things, the Sydney Morning Herald report states:

 Dr Henry told a conference in Sydney yesterday that the pension and the public housing system discouraged people from joining the workforce.

Dr Henry is right, although the dynamics involved are beyond the scope of this post.

Accepting that I am taking Dr Henry out of context, he was speaking about reforms of the tax system, my point remains that the current situation provides an opportunity to introduce otherwise unpalatable changes.

There is, I think, a popular feeling that the current economic crisis provides an opportunity, indeed need, to spend. My point has always been that we need to spend wisely to minimise the loss of other opportunities a little down track.

One thing that has surprised me in recent economic developments has been not just the speed of transmission between countries, but more importantly the scale of the decline in certain activities.

The decline in car sales round the world, for example, has been far greater than could be justified on the simple indicators. We are dealing with a crisis driven by a consumer strike. In micro-economic terms, demand curves have shifted.

The Australian trade figures released during the week can only be described as quite remarkable.

Focusing first on imports, in February imports fell by one per cent in seasonally adjusted terms, two per cent in trend terms. Yes, Australian consumers too have partially joined the consumer strike (imports of consumption goods were down 13%), but this was largely offset by increases in other areas.Goods credits February 09

Think about it for a moment.

Around the world, imports have collapsed, mirrored by collapsed exports. In Australia, and as shown by the attached graph, imports are down, but not by all that much.

Turning to exports, in trend terms our exports were down by just 2%, up 4% in seasonally adjusted terms.

Australia's good trade performance was driven in part by a big increase in gold exports. However, Australia's rural exports also rose by no less than 6%. This is mirrored in New Zealand, I do not have the link, where agricultural exports also showed improved performance.

Very early, I focused on Australia's international trade position as the single most important determinant in the country's ability to ride out the global economic storm. Here I suggested that Australia's trade position had turned round at just the time required to help through the downturn.

Australia international trade February If we now look at the overall position, and taking into account major adjustments to previous estimates that make the detailed changes a little difficult to interpret,  the ABS graph of the balance of trade on goods and services shows just how well Australia has done. 

Reflecting Australia's trade performance, the Australian dollar has risen from a bottom of 57 cents US to 70 cents US.

I thought that 57 cents was absurd taking the fundamentals into account, although it gave the country a rather nice buffer. Seventy cents? Mmm, here I am less confident.

I am in the business of explanation, not forecasting. The next crunch point will come with the ending of current export contracts for some key commodities this month. This is the point at which the Access Economics doomsday scenario is meant to come into play.

I can't really comment without detailed checking of the figures. That said, at this point my feeling is that Australia's trade performance has given us a very real cushion. A $5 billion monthly deterioration, a huge change, will now simply take us back to where we were in the early part of 2008.

Australia remains the lucky country.

I am out of time.

I had intended to finish by discussing some of the shifts in the global economic tectonic plates, but this will have to wait.

Thursday, April 02, 2009

Odd disconnects in global economic discussions

Re-reading an earlier post, Australia's fascinating economy, I saw one thing that I need to correct, a case of loose wording. I wrote on 3 March 2009:

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 (on the economy). To my mind, the real crunch point is still some months away.

I had been discussing the way in which rapidly changing data had affected commentary on almost a daily basis, positive one moment, negative the second.

My core position for many months has been that it was just going to take time for current economic problems to work themselves though, that the effects of the various packages intended to stimulate consumption in different economies were likely to be limited, that on the Government side we had to wait until the capital spend measures kicked in and that this would take time.

I have also generally been more positive than most of the commentary, especially so far as Australia is concerned. In December I summarised my position this way in a magazine article:   

The problem with economic statistics is that, by their nature, they tell us what has happened in the past and with a lag.

It is now clear that the US and international economies were already slowing rapidly at the time the global financial crisis broke. This explains in part why the financial crisis flowed through so quickly and dramatically into contraction in the real economy. However, the scale of the existing slow down was not clear at the time the global financial crisis broke.

All Governments responded to the crisis with action to prop up their banking systems to try to break the credit gridlock that had brought world financial markets to a halt.

As the scale of the crisis in the real economy became clear, Governments then responded through fiscal policy. This took two forms – actions to try to encourage consumption and consumer confidence, followed by stated plans to expand capital investment especially in infrastructure.

From an Australian perspective, several important things should be noted about this global response.

The first is that actions to encourage consumption have not been very successful to this point because they do not address the underlying causes of the problem in the first place. They are best thought of as an asprin to try to ease the immediate symptoms, one that will leave most Governments with high medical bills in the form of increased budget deficits.

Capital spend is different because, sensibly done, it adds to productive capacity and social infrastructure. So there is an immediate economic impact from the spend, followed by a longer term pay-back.

The difficulty is that capital spend takes time to ramp up. The trillions of dollars now committed to capital spend will really begin to affect the world economy about eighteen months out.

The world is now awash with liquidity that nobody wants to use, interest rates are at historic lows, while the global inflation that seemed such an emerging problem only six months ago has vanished.

As global Government capital spending really starts to kick in, the stage is set for quite rapid economic expansion. In the meantime, the economic flue is likely to continue.

Against this background, I wanted to qualify and amplify my use of the words "crunch point". By this I simply meant that it would still be some months before we would know whether the optimists like me or the pessimists were right.

If I am right in my analysis, we will see a growing stream of good news in the midst of the continuing bad leading to a clear bottoming of the downturn and then growth. Here my main expressed concern has been that the liquidity washing round in the global system might then force governments into contractionary action, prematurely curtailing the upswing.

I am not opposed to stimulatory measures. However, I do think that we should be paying more attention to ways of managing the after affects of the combined stimulation measures.