The answer to both these questions, historically, is yes. In the future, it’s all change.
If I was to characterise the behaviour of non-mining Australians in the last five years it would be hard working, high savings, low inflation and, consequently and perhaps unfortunately, we’ve had a low growth economy. We’ve also become more productive (largely in the Glenn Stevens, everyday decisions by individuals sense rather than the big reform program sense) and there’s been a detente between labour and capital (with some clear exceptions). In other words, it is an economy eerily similar to Germany.
Couple this with a high margin export industry reliant on China and the similarities are seemingly complete. The last thing Australia needs is a current account surplus and I’d suggest this is likely sometime next year (A current account surplus being a function of stable to falling capital imports, falling consumer imports, a function of price, and a strong increase in commodity exports).
Such a shift to a more Teutonic economy requires a change in both expectations and, more importantly, the economy’s structure.
As Australians save more, for instance, revenue growth has been much slower in many of the cyclical and household related industries. Coupled with the internet and a strong Australian dollar, this has necessitated structural change. In part this has included a much needed improvement in productivity, while elsewhere it’s seen businesses destroyed. In both cases, it’s cost jobs or slowed wage growth. As a result, employment expectations have shifted lower, though the economy has become stronger by dint of survivor bias.
For instance, this data from the ABS, compiled by RP Data, show that 1,644 real estate and related businesses closed in 2012. I would imagine this reflects the moribund property market of 2012. Even worse, over 3,000 small finance firms closed, around 3% of the total number of firms in the industry. This was the sector that was most hard hit by slowing transaction activity in Australia.
Weak growth has created a stale economy
Slowing growth and transactions have reflected changing behaviour, particularly in the housing and labour markets.
According to historic data, Australians move home every five to seven years. This makes sense. From the time Australians move from home, to the time they have a settled family, their housing requirements shift dramatically: a shared house, to a small unit, to a small attached home, to a detached family home and often in different suburbs. While in our later lives, we might live in a home for twenty years, in the first twenty years of our independent lives we’re moving regularly. Often this will entail selling a home.
Current data tells a very different story. The average seller of an Australian home has been in the house for ten years. A lot of the natural movement within Australian society has not taken place because we’re staying longer in our homes. So is this a new character trait? Something a little Germanic, perhaps? My answer is no.
I think the whole de-leveraging phase, coupled with weak house price growth has meant Australians are staying in their current accommodation longer. As a result, I believe, there are a large section of households keen to move. For instance, my family and I bought a house this year. We bought the house from a family with two children: toddlers when they moved in in 2003, teenagers when they leave in 2013. The house was no longer big enough for the family. Similarly, I have a friend who moved into a two-bedroom house with a baby, and he’s still there with four children. Australians have been waiting to move.
The labour market is similar. I don’t have as clear a picture but a recent anecdote may highlight the point. A friend recently moved cities and are looking for a particular role. On receiving a rejection letter, they were told there were 18,000 applicants. Now, some will argue this means unemployment is much higher. I don’t see real evidence for this. It’s not showing up in the ABS stats and nor does it feel like so many are unemployed.
I think this story simply illustrates the nature of the Australian job market at the moment. After running hot through 2003 to 2007, it was on hiatus, through 2008, with some layoffs. These laid off people were then re-hired in 2009, 2010. Since then, new jobs seem to have been mainly a function of mining and natural attrition. There has been limited new hiring in the non-mining sector and those with jobs have been content to hold on to what they have. But now, six years on from the last period of strong hiring, Australians are becoming more willing to replace stale jobs for fresh opportunities.
So what drives a fresher economy?
The consensus views says the economy’s in a funk and so it will be for the foreseeable future.
But, I’ve laid out the case for change above, all we need is a catalyst. The catalyst is now clear: the current record low level of interest rates. Housing affordability in Australia is now more affordable than it has been in at least five years, but probably closer to fifteen (the data’s changed). In turn, I suspect there’s a housing boom commensurate in size with the late-1980s and the early 2000s. Strong latent demand is in the process of being realised.
With housing activity picking up, all the ancillary benefits for the economy will re-emerge, leading to a much stronger economy that allows the economy to freshen up, somewhat. Not such a bad outcome, seemingly.
Economists aren’t meant to like times like this
And neither do I. It’s unmistakably true that Australia needed to freshen up. Turnover in the economy needs to rise. But it’s not clear to me that this wouldn’t be happening, albeit at a slower pace, if the RBA wasn’t pushing the need to transition to a non-mining economy. Current monetary policy in Australia risks exposing the economy to a nasty boom-bust cycle.
Lower interest rates have accelerated a process that I believe would have started to happen, no matter. The high rate of savings in the economy would have allowed Australians to start to improve their housing situation through their improved balance sheets rather than through lower debt servicing costs. Such a balance sheet driven cycle would have seen slower house price appreciation (according to RP Data, Sydney prices are up 6.5% since June). Instead, house prices are rising at a rate that risks the need for the RBA to raise rates faster than they would like.
What’s more, the fall in the Aussie dollar has made Australian homes relatively cheaper on a global basis. Aside from making house prices more expensive for Australian residents, it is also, arguably, the case that a foreign buyer who may not live in the house is less likely to spend elsewhere in the economy. That is, the multiplier from a foreign purchase of an Australian dwelling is lower than the multiplier from a resident owner-occupier’s purchase of an Australian dwelling. A similar argument can be made for investment purchases. The investment case for Australian housing is compelling: interest rates are so low that investors are, currently, positively geared (they’re making a profit). I’d argue an investor purchase, too, has a lower multiplier than that of an owner-occupier.
It’s also the case that the timing of the transition to the non-mining economy has perhaps been premature. Without a collapse in China demand, the fall in the Aussie is more likely to contribute to more mining investment or activity than an increase in manufacturing or other non-mining export sectors. Australian mining now looks more attractive. Commodity prices have held up and the hard work to control costs when the dollar was strong means Australian mining is relatively productive against, for instance, Africa with its US$ costs.
What’s to come?
As I’ve argued before, potential growth in the last five years in Australia was probably no more than 2.5%, given the extent of the de-leverage. Indeed, a recent UBS report* highlighted the inability of the ABS to properly measure what was probably a credit contraction in 2010 and 2011. 2.5% is not far off German trend growth.
But we’re not German. We are both younger (53 rd oldest economy with a median age of 37, compared to 4th and 42 for Germany) and have strong population growth (105th with 1.13% compared to 208th with -0.20%). Both these factors demand, all things equal, that Australians invest more than Germans at the same rate of interest. The last five years have been an important aberration in a long term trend. They’ve allowed Australians to repair over-extended balance sheets and for the economy to become more productive.
As a result, growth in Australia will accelerate towards trend and probably over shoot. As long as no China disaster emerges, growth will accelerate to the point that the RBA is raising rates in the second quarter of next year. The best outcome will be a housing boom with higher activity levels. More problematic would be a price boom with the same activity levels. For the best outcome to emerge, a higher dollar would be best.
*A UBS analyst, quoted in the AFR, said: “On top of this we believe that many customers redraw their mortgages to fund renovations or even upgrades to new properties. Further with investment housing lending many borrowers have multiple properties and will redraw from an existing loan facility to fund new purchases or re-leverage existing homes to maximise negative gearing tax deductions. Such actions will not be picked up by the new funding statistics.“