Posts Tagged‘stimulus’

June Quarter National Accounts: Another Swing and a Miss!

Today we will see a release of the National Accounts document from the Australian Bureau of Statistics which will give us a very clear idea of how Australia’s has faired since it narrowly avoided a recession just 3 months ago. As with any ramp up to figures like this, especially during tough economic times like this, there’s already a healthy amount of speculation abounding with the growth currently tipped to be somewhere around 0.2%:

Most economists’ forecasts were revised down after figures yesterday showed a worse-than-expected current account deficit.

Still, it would be the second consecutive quarter of growth after the December quarter’s contraction of 0.6 per cent.

Annual economic growth is expected to come in at just 0.2 per cent.

Joshua Williamson says household spending kept the economy afloat in the June quarter.

“Consumers have gone out and spent some of their stimulus payments and we’re expecting to see that through the household consumption data,” he said.

BT Financial Group’s chief economist, Chris Caton, says the economic picture will be mixed and goes beyond the gross domestic product figures.

“Although GDP growth has remained close to zero and/or positive except for one quarter, we’ve taken a 2 per cent hit to the unemployment rate, so we certainly have been affected, but not as much as elsewhere.”

I was going to wait for the figures to be released prior to posting this however I realised that regardless of the outcome my stance would be the same: Whilst Australia might be the only developed nation dodging the dreaded “r word” this is not something that signalling a bigger crash further down the road, as many doom and gloomers would have you believe. We as a country are very well set to ride out this global financial crisis as the problems that plagued the United States and many other countries simply aren’t present here (which I’ve blogged about previously).

There are 2 quips I commonly encounter from my friends over on the doom and gloom side of the fence. The first is that Australia only avoided a recession due to Rudd’s initial cash splash for over 8 million Australian tax payers. I give this some credit as for the most part it was spent as intended and the saving or paying off debt helped ease the burden on banks. However the idea falls down when you see that the unemployment rate around the same time showed signs of levelling off. The next round of unemployment figures (due out this time next week) will settle this issue succintly, and I’ll make sure to do a follow up then.

The second is that through their other stimulus initiatives (mostly the First Home Owners Grant boost) are keeping asset bubbles propped up which give the false impression that we’re doing fine and a crash is soon to come around the bend. Whilst I can appreciate the idea that housing is relatively expensive in Australia I always question the algorithms people use to come up with their metrics. The standard would be median house price to median wage (the median multiple) which I remarked about in the comments on a previous post. Such a metric is an extremely blunt too with which to judge housing affordability as there are many other factors that can influence what constitutes affordable housing. Take for instance the situation back in 1990 and compare it to today:

  • Data:1990/Today
  • Interest rate: 14%/3%
  • Average wage: $30,576/$53,404
  • Average house price: $100,000/$468,819
  • Median multiple: 3.27/8.77
  • Average mortgage repayment: $14,000/$14064

That last line is the kicker. With interest rates this low the average mortgage will be only $64 more than it was 20 years ago. This also doesn’t take into account that first home owners should not be buying a house in the median price bracket and should start out with something that’s less desirable but affordable (both of my current mortgages are below median properties, so I’m not just peddling nonsense here). Housing is affordable for those in a stable job and do their research. The main problem I see is a crisis of desire as most people want the large house close to town, which as a rule of thumb will always be out of reach of the first home owner.

BREAKING NEWS:

As I was writing this post the figures were released! Here’s the low down:

GDP (Chain volume measure)
Trend
0.3
0.3
Seasonally adjusted
0.6
0.6
Final consumption expenditure (Chain volume measure)
Trend
0.5
1.6
Seasonally adjusted
0.8
1.9
Gross fixed capital formation (Chain volume measure)
Trend
-1.9
-3.2
Seasonally adjusted
0.7
-2.3
GDP chain price index
Original
-2.2
-0.5
Terms of trade
Seasonally adjusted
-7.4
-11.6
Real net national disposable income
Trend
-2.2
-3.2
Seasonally adjusted
-2.0
-3.2

Staggering. The figures show that even before seasonal adjustment we still come out ahead. Australia has now had 2 quarters of small positive growth, so much for a recession ey?

Recession: Swing and a Miss.

With the ABS releasing its National Accounts figures yesterday a strange thing occurred, we avoided a recession. In a seemingly unprecedented move the Australian economy rose above negative territory and showed a small positive growth of 0.4%. The results of this news was almost instantaneous with the share market closing slightly higher overall. Whilst I’m cautious about this signalling the end of the bad economic times for Australia (and I’m glad Rudd doesn’t think that either) it does show that as a country we are well placed to ride out this crisis with the least amount of impact to our daily lives. There are a few key points to take away from the ABS’ figures however.

Firstly we need to take a look at what the contributions to the GDP figure where¹:

contribution

What we can see here is growth in Agriculture, Mining, Energy, Construction and Retail. What’s not doing so well is Manufacturing, Wholesales, Transport and Property and Business services. Whilst the strong growth in agriculture is a good sign the rest of the industries that showed growth only had small increases. Undoubtedly the retail figures are backed in part by Rudd’s stimulus package which also drove up imports. There was also some additional growth (about 0.5% from the previous quarter) in terms of exports, which could be put down to how cheap our dollar was until recently. The most worrying parts of these figures are the manufacturing and property and business services, as they represent a good chunk of where Australia’s future problems lie.

When the manufacturing numbers are down it usually means that there’s been a downturn in demand and this has been seen for the past few quarters. Whilst we can easily point the finger at the GFC for this one it signals that there is a decreased demand for production within Australia. Further to this we’ve seen an increase in the amount of imports over this last quarter showing that less is being sourced from within our country. Due to the dollar rising this could soon change however I believe the damage might have already been done, as many manufacturing plants have already begun to thin their workforces. Trying to take advantage of the strong local dollar will prove difficult for such companies as they will no longer have the capacity to increase production.

The property and business services is a little less worrying as there has been quite a lot of wealth knocked out of the top end of the market which will drag the entire sector down. Business are also cutting back on expansion plans and additional services so this is not particularly surprising either. However this figure still represents a downturn in this sector, but I believe that it is far better placed to recover than manufacturing is.

So overall I believe Australia’s resource backed economy is serving it well through this recession. We’re still feeling much of the pain from the GFC but at least there’s some signs that once confidence comes back to the markets Australia as a whole will be well placed to take advantage of it. The key issue for the Rudd government now is how to keep unemployment low through the next year or two so that we don’t lose our strong resource and manufacturing workforces, something which will cost a lot more to replace in the future.

¹Australian Bureau of Statistics, 2009,  Australian National Accounts: National Income, Expenditure and Product, Mar 2009 cat no 5206.0 , viewed 04 June 2009, http://www.abs.gov.au/AUSSTATS/[email protected]/productsbyCatalogue/35F488B5F9F7D242CA256DF000814610?OpenDocument


Sit Back, Relax, and enjoy the Recession.

Our beloved Prime Minister Kevin Rudd has finally used the R word to describe Australia’s current economic situation:

The worst global economic recession in 75 years means it’s inevitable that Australia will be dragged into recession,

The challenge for government is to cushion the impact of recession on business and jobs, through the actions we take, through economic stimulus strategy.

Up until now Rudd has been referring to the situation using terms such as economic tough times and making reference that Australia is not immune to the global economic climate. Whilst this would seem a much of muchness when it comes to describing Australia’s current economic position it is actually a powerful rhetorical tool. Some particular words love to wreck havoc with the stock exchange and recession is one of the bigger ones (with regulation being my all time favourite). Looking back to December last year the Federal Reserve Bank of America officially announced that America had slumped into a recession.  This was then accompanied by a huge rush in stock sell-offs and had the Dow Jones finishing almost 8% lower, its fourth worst drop in history. Official figures using certain words can really get people in the mood to sell.

Whilst Rudd’s announcement has done little to stir the market it does put people on notice that when the next quarterly figures come out they’ll probably be negative and this puts us into the technical definition of a recession. In reality this starts to get the execs thinking more about cost cutting, improving their returns on investment and adopting new strategies to cope with economic climate. In essence Rudd is attempting to pre-empt an announcement by the Reserve Bank so that people start thinking about it now, rather then panicking when the R word is used officially.

Whilst it’s a good move overall for Rudd there’s probably a few more things he could do in order to gear people up for the coming recession. His current focus of stimulating the economy through handouts, a few infrastructure projects and supporting small businesses will provide a decent amount of short to medium term boost to the economy. However there is little in the package about longer term investments or adjustments to the banking sector, and rightly so. After the initial down turn businesses will start to pick themselves up off the floor again, and the economy should start turning itself over as per normal. Rudd is doing a good job of keeping in everyone’s good graces and this will do well for him come election time. I’d be really interested to see what policies he brings forth when he doesn’t have to contend with the world falling down around him.

Tell ’em They’re Dreaming.

The Global Financial Crisis is hitting everyone, and with each passing day it would appear that it is hitting more and more people directly. With the unemployment rate hitting 5.2% back in March the figures do support that idea, with many economic forecasters saying that it could hit as high as 10% next year. Primarily this will hit the Blue Collar workers first as companies seek to reduce output in order to keep themselves afloat. Whilst it is a valid business strategy in time like these I often wonder what would happen if we simply forgot that this was happening.

Australia as a whole is in a strong position in terms of weathering the storm. Our economy is based strongly on resources (rather than services) and with our main export being coal for power generation and heating, which people will still want during a recession, we are well placed to continue on as per normal. However, economic growth was down 0.5% for the December quarter with the great decline shown in non farm GDP (whilst Farm GDP grew a whopping 10%!). Could it be that companies and consumers are cutting back just because of the threat of the economic downturn, and not because they are actually feeling the hardship?

Up until around September last year interest rates had been steadily rising in order to combat the extrodinarily high inflation that Australia was experiencing. It seemed that no amount of interest rate hikes could reel in consumers, even with fuel and transportation costs soaring at the same time. However, once people were told of dark economic times ahead suddenly that all changes, and the Reserve Bank is forced to try and spur the economy on by cutting interest rates in quick succession for months on end. Did everyone really lose all their spending power in under a month?

All the stimulus packages are based around the same thing, trying to inject cash into the consumers and corporations so that they’ll spend it, hopefully spurring the markets on so they’ll recover through normal means. How is this so different from having the media say to everyone “The economic crisis is over, we’ve done X and changed our policies Y… etc etc” and then have everyone return to their normal ways of spending? The average Joe has already been manipulated by the media to believe that the world is coming to an end, what’s stopping the media from telling them that everything is ok?

There is of course, a happy middle ground between what the government is doing now and blatantly lying to everyone about the current economic situation. Large government owned and funded projects like say, a light rail system for Canberra (We’ll have it one day folks!!!!) will create jobs and provide that first step into repairing the market, tempting private companies back in. I say government owned and funded mostly because of the recent catastrophe that occurred with BrisConnections, a privately owned but government subsidised project.

So I’d recommend a two pronged approach. Cease the constant reporting on the GFC and have the government start up a large number of projects in order to create some sustainable jobs for the battlers out there. It’s not the easy route and if a change of government happens next election Kevin Rudd will be hard pressed to take credit for his work. However, should he do it and ge re-elected he will be remembered as the herald of the new economic good times, something that people like me will find hard to forget.

Financial Minimums and the Global Financial Crisis.

With the Global Financial Crisis savaging our world’s trade and capital markets people are looking for more ways to scrimp and save in order to whether these tough times. This got me thinking; what are the financial minimums that are required for a person or family to maintain a reasonable level of living whilst still being able to save for times such as these? Of course the government has figures on this since that is what many of the welfare payments of this country are based on, but they don’t really provide any insight into what the makeup of that payment is.

For this blog post I will attempt to explore the minimum costs involved in living as a single person, and then as a typical 2 parent 2 child Australian family. I will draw the majority of my figures from online sources of public information so that there’s as little guesswork as possible.

So let’s tackle the easy one first, the single bachelor/bachelorette, what do they need? I will for the moment assume that they have most things like furniture and appliances, but I will show what would be needed if they don’t:

  • Shelter: Since they’re single we can assume that a 1 bedroom 1 bathroom apartment will do. A quick search on Allhomes reveals this property for $150 a week. We can assume this is about average, as many people can share accommodation for around this much (3 bedroom for $450 a week would net them something quite a bit better, if they’re willing to share).
  • Food: Estimates of average daily intake for an adult peg it somewhere between 1940 (for women) and 2550 (for men). Let’s make it easy and put it at 2200 so we get an average. Breaking this down into 3 average meals a day could be done with: Breakfast: 2 weet bix or similar, milk coffee (300 calories)Lunch: 2 Sandwiches, salad or left overs (950 calories) Dinner: Meat, pasta and vegetables with premade sauce (950 calories). Plugging this all into an online shopping website gives a weekly cost of about $91, but I’d probably bump that up to $110 just to be on the safe side.
  • Clothing: I could take the easy route here and say that they could go to the local op-shop and clothe themselves for $20 per year but that’s just not typical. For myself I’ll usually end up buying 1 set of work clothes (2 pairs of pants, 5 shirts, 1 set of shoes) and various casual clothes (5+ shirts, 2 pairs of pants, 1 set of shoes). If we go cheap then that comes to about $830 a year, or $16 a week.
  • Transport: I’m going to assume they have a job of some sort and will have to travel to get there. If they grab a monthly bus ticket their travel costs come to about $21 a week for unlimited travel on the buses.
  • Entertainment: As much as all the financial experts will like you to cut out things like this I know that most people won’t, and so it doesn’t get left out of the calculations. Whilst I can’t speak for everyone on this (since it is so subjective) I’ll put in a rough $50 a week on this. That could be movies, a night out with friends or just a couple drinks at home.
  • Utilities: My house, with 3 people in it, averages around $42 a week in electricity, $5 in phone and $25 in internet. Cut this down to single person size and you have a grand total of $24 a week.
  • Necessities: Just to make things interesting let’s also assume this single person is just starting out and doesn’t have all the required furniture to live. If we budget around $5,000 for this and say they get one of those interest free deals (which are fine if repaid before the interest free period is up) and repay it over 3 years we’re looking at another $33 a week or so.

Putting this all together gives us a total of $371 or $404 if they are just starting out. If we want to save about $50 a week this means their yearly income will have to come to somewhere between $25,000 and $30,000 a year. This does not take into consideration unexpected things like medical bills, which would put that further up the scale to $35,000.

Looking towards the family we can take that yearly income and double it just for starters (2 adults). A child costs about AUD$800,000 to raise from 0 to 17. Putting a weekly figure on a weekly basis is a whopping $980 a week, or almost $2000 for the 2 kids. I’m going to scale that figure back to about $700 since there are savings to be made on housing, clothing and food in a family situation. It is still a phenomenal cost, which brings the family income up to a required $150,000 per year, or $75,000 per parent. It’s no wonder that Australians on the average wage with a family will be doing it tough.

I’ll be honest and say that I wasn’t too surprised by the single people figures, but the family ones really blew me away. I’m fairly well off, but if my fiance wasn’t working because she had a child we’d be below my required income threshold, putting us in an awkward position. It’s really quite telling about the current economic situation as the ones who are losing their jobs are the least likely to have savings, due to the costs they incur just to survive.

Taking this into consideration I believe that a portion of the economic stimulus package should be used in either increasing the minimum wage or cutting tax for just the lower to middle income brackets (of which I’m not a part of, so there’s no vested interest there). Whilst I don’t need to explain what tax cuts would do for the lower income brackets I should mention what I mean by raising the minimum wage.

The government could provide subsidiaries or incentives for minimum wage earners. This could come as a payment to both the employer and employee, along the lines of Newstart allowance. This could even be done with a reform to the current welfare system, changing the income thresholds for wage earners who are on Newstart allowance or similar.

Whilst I don’t believe that all of the stimulus package is going in the wrong places I do believe that its target is a little fuzzy. Sure some of it is well placed (aligning with my objectives pretty closely) however there’s a lot of places where money is going and no tangible benefit is being projected. Whilst I can understand that such legislation has probably be done a little hastily you’re still talking a good $42 billion of Australia’s dollars, which requires a little more then 2 months thought into spending.