Tag: exchange rate

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Productivity not population key to Aussie living standards | Macrobusiness

From Leith van Onselen at Macrobusiness:

Former ALP minister Craig Emerson has penned an article in The AFR calling on the Morrison Government to tackle Australia’s declining productivity growth, which is central to boosting the nation’s living standards:

“Productivity growth has contributed 95 per cent of the improvement in Australians’ material living standards since 1901”.
“From the turn of the century, Australia’s productivity performance began to slide and the longer it has gone on the worse it has gotten”.
“Over the period from 2015 until the COVID-19 pandemic struck, actual productivity growth was worse than the low-productivity scenario included in the 2015 intergenerational report”.
“In the decade since 2010 – even excluding last year – Australia recorded its slowest growth in GDP per capita of any decade in at least 60 years”.
“Without a comprehensive economic reform program, Australia will inevitably have weak growth in living standards during the remainder of the 2020s and into the 2030s”.

Craig Emerson’s assessment is broadly correct, as evidenced by the stagnant real per capita GDP, wage and income growth experienced over the past decade (even before the coronavirus pandemic).

Sadly, however, the Morrison Government with the help of the Australian Treasury seems hell bent on leveraging the other ‘P’ – population growth – to mask over Australia’s poor productivity performance and to keep headline GDP growing, even if it means per capita GDP, income growth and living standards deteriorate.

Rather than using the coronavirus pandemic as an opportunity to reset the Australian economy to focus on quality over quantity, the Morrison Government is intent on repeating the policy mistakes of the past by returning to the lazy dumb growth policy of hyper immigration.

Rebooting mass immigration will inevitably contribute to Australia’s poor productivity growth by:

  • Crush-loading cities, increasing congestion costs and rising infrastructure costs;
  • Encouraging growth in low productivity people-servicing industries and debt creation, rather than higher productivity tradables; and
  • Discouraging companies from innovating and adopting labour saving technologies.

It’s time to put the Australian Treasury’s Three-Ps framework to rest once and for all, along with the snake oil solution of mass immigration.

Policy makers must instead focus first and foremost on boosting productivity, followed by lifting labour force participation. These are the two Ps that actually matter for living standards.

We agree with the concern over poor productivity growth, but focusing on labor force participation is putting the cart before the horse. The key cause of low productivity growth is declining business investment.

Business Investment

Without business investment, new job creation and wages growth will remain low. The way out of this trap is to prime the pump. Boost consumption through infrastructure programs — investment in productive infrastructure that will boost GDP growth (to repay the debt). Boost business investment through strong consumption, a lower Australian Dollar and tax incentives (like accelerated write-off) for new investment.

The lower exchange rate is important to rectify a serious case of Dutch disease1 from the resources industry. There are only three ways to achieve this:

  1. Increase imports, which would be self-defeating, destroying jobs;
  2. Reduce exports; or
  3. Export capital, of which Australia has little.

China is doing its best to help us with the second option, by restricting imports of a wide variety of Australian resources, but that has so far achieved little. David Llewellyn-Smith came up with an interesting alternative:

If we accept that the CCP is the latest manifestation of the historical tendency to give rise to political evils intent on dominating the lives of freedom-loving humanity, then why don’t we cut the flow of iron ore right now…….

The results would be instant. The Chinese economy would be structurally shocked to its knees. 30% of its GDP is real estate-related. 60% of the iron ore that drives it is sourced in Australia. Roughly speaking that is 18% of Chinese GDP that would virtually collapse overnight. Vast tracts of industry would fall silent. An instant debt crisis would sweep the Chinese financial system as its bizarre daisy chain of corruption froze. Local governments likewise. Unemployment would skyrocket.

…..What we can say with confidence is that it would pre-occupy the CCP for many years and hobble it permanently. Its plans for regional domination would be set back decades if not be entirely over.

The problem is how to convince the old boys around the boardroom table at BHP that this would be in their interest as well as in the country’s interest.

Notes

  1. Dutch disease is a term coined by The Economist to describe the impact on the Netherlands’ economy of a resources boom from discovery of large natural gas fields in 1959. The soaring exchange rate, from LNG exports, caused a sharp contraction in the manufacturing sector which struggled to compete, in export markets and against imports in the domestic market, at the higher exchange rate.
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Australian disease will be one for the text books | Macrobusiness.com.au

From Houses & Holes
at 9:01am on December 10, 2013:

While the nation continues to debate whether we should let this business go or bail out that business, the real issue continues to be ignored. Indeed it is so far off the radar that cheap shot commentators like Michael Pascoe can make wise cracks about it while the economy burns.

But it’s not funny. It’s not even a little bit amusing. Australians are being slaughtered by emerging markets; gutted by the Japanese; truncated by the Americans and butchered by the Europeans.

I am talking about the global currency war that we are comprehensively losing while having our backs turned.

Qantas, Graincorp, Holden, Electrolux. These are all iconic Australian businesses that have absolutely no reason to fail. Two are virtual monopolies that should be making money on a conveyor belt. The third and fourth are high tech industries that should be tailor made for a smart, developed economy.

But instead all four are failing  because they can’t compete with leaner and meaner foreign operations.

Qantas can’t get cheap enough finance and has no access to cheap fuel the way Middle Eastern airlines do. Graincorp is saddled with out-dated infrastructure and can’t seem to raise the capital to renovate itself despite a supposed “dining boom”. Detroit has confessed that Holden is being pulled out owing to a structurally higher dollar and labour costs. Electrolux is the same.

Metals refining, surely an area in which we should have a distinct advantage, is also failing, with last week’s Gove refinery the latest casualty. Processed food exports haven’t grown since 2005 while raw agricultural foodstuffs have jumped. We’ve already lost half of our petrol refining capacity. The Productivity Commission nails all three for dragging down productivity growth owing to high wages, low investment and idle capacity (read the dollar):

dfbsbd

As these various businesses pack up their kits, our manufacturing sector is headed for an unbelievable 5% of GDP, by far the lowest in the OECD (making Luxembourg look like an industrial powerhouse) and approaching or past a point at which the inability to produce material for ourselves is also a strategic risk.

Most disconcerting of all is that this is transpiring as we head into a great reckoning in the wider economy. The mining boom is ending, its fabulous capital wave is subsiding, its huge ramp up in employment is ebbing, and over the next three years it will recede as fast as any business investment correction in the last one hundred years. We’ve plenty more gas but are too expensive to extract it. Perth’s Magnolia LNG is headed to Louisiana to produce gas there instead.

The plan to build more unproductive houses to fill the void is a classic kick of the can, adding to capex briefly but adding nothing to productive capacity.  In the mean time it keeps our wages and interest rate structure temporarily high and makes the underlying problem worse.

The prospects for productive Australian industry are waning daily. Yet the dollar is still sitting at 90 cents, boosted by the same countries’ central banks that are feasting on our production, and pouring Dutch disease into our ears while we sit back and debate which business is worth saving.

The issue is not who do we bail out. It is how do we reverse the trend of uncompetitiveness that is sweeping everything offshore that is not buried in, or cemented into, the ground. The currency must be actively lowered or it will only drop when the economy does, leaving us bereft of a rebound.

Australian disease is entering its terminal phase, and boy, is it going to be one for the text books.

Reproduced with permission from Macrobusiness.com.au

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GM and Toyota may follow Ford’s lead and shut plants in Australia – Quartz

Nandagopal J. Nair writes:

The biggest drag is is a strong Australian dollar, which is making local manufacturing uncompetitive compared to imports. Over the past 12 months the currency has traded about 30% above its three-decade average. Its strength has pushed up manufacturing costs, making Australia the third most expensive country to do business in, according to the IMF.

Read more at GM and Toyota may follow Ford’s lead and shut plants in Australia – Quartz.

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The road not taken | Macrobusiness.com.au

By Houses & Holes at Macrobusiness.com.au
The Road Not Taken

So, with our Federal election mostly over, at least enough to get a good sense of where we’re going, I think it’s fair to conclude that we are not going to get out in front of the primary economic issues of our time. On the contrary, we’re going to make things worse for ourselves.

The only issue that this election should be about is the management of Australia’s post China boom adjustment yet it is barely mentioned. Where does this leave us then? First, let’s describe the issue once more.

Following the housing and mining booms in the post-millennium economy, in structural terms Australia finds itself with very high household debt but low public debt, very high asset values and historically low competitiveness in all industries including large swathes of mining and still high but falling terms of trade. In cyclical terms, we face big falls in the terms of trade, very big falls in mining investment, a probable stall and possible fall in national income, a still very high but falling currency and ongoing weak nominal growth as well as fiscal instability.

There have been two sensible policy matrices from our eminent economists aimed at managing the problems ahead. The first is by Warwick McKibbin, who has suggested that we both:

  • lower the currency asap through targeted money printing and
  • support economic growth, incomes and productivity through a large public infrastructure program.

These two make sense together because they simultaneously support weak private sector investment, boost competitiveness through the currency and productivity enhancements and prevent asset bubbles. However, it does risk a widening current account deficit and may leave you still uncompetitive at the end of it.

The second matrix of policy suggestions has come from Ross Garnaut and Peter Johnson who have focused more directly upon the issue of competitiveness. Garnaut argues that a nominal exchange rate adjustment (via the currency) is not enough. He sees our lack of competitiveness as so extreme – and it is hard to argue that it is not – that a real exchange rate adjustment is required. That means not only must the currency fall a lot, but as tradable costs rise, wages must not. He argues:

  • we should slash interest rates to lower the currency as soon as possible;
  • use macroprudential controls if low rates cause credit to rise too fast;
  • contain wages through a national program of burden-sharing and
  • deploy budget discipline as well as launch an unfettered productivity drive.

Johnson sees the same competitiveness issue but argues that monetary policy cannot serve two masters (addressing both currency and inflation) and prefers that we:

  • install capital controls to lower the dollar as soon as possible;
  • use interest rates to prevent asset bubbles;
  • deploy budget discipline as well as launch an unfettered productivity drive and
  • thinks recession is inevitable as a mechanism to lower costs.

My own view is that a combination of the McKibbin and Garnaut approaches is the way to go:

  • undertake a moderate, productivity directed infrastructure public spend to support growth, jobs and income;
  • slash interest rates to lower the dollar;
  • install macroprudential tools to ensure no credit blowoff;
  • undertake a national burden-sharing narrative to ensure wages don’t rise. We may not able to get a new wages accord but I would still bring everyone together and reframe the conversation, and
  • push for productivity anywhere and everywhere.

This approach ensures assets don’t deflate too quickly as we restore competitiveness in real terms. To my mind  it is the basic minimum of policy innovation required, before we even get to tougher questions about Henry Review tax reform, cutting housing speculation incentives and making supply side reforms, increasing savings and taxing resources properly that will help us transition permanently towards a more balanced economy as well as tackle our long term demographic challenges.

Turning to the real world, what do we have from out elite currently?

  • the RBA is slashing interest rates too slowly to bring down the dollar fast enough;
  • it has explicitly repudiated macroprudential tools thus risking an even bigger asset bubble;
  • both political parties are ignoring the adjustment ahead in narrative terms
  • both parties are focused on long term spending but little on medium and short term productivity measures
  • both parties are ignoring probable ongoing fiscal instability and supporting interest groups over national interests

Where will this lead? It means we face a longer and ultimately more debilitating decline. The lack of redress for the dollar and inflated input costs ensures no big rebound in our tradabale sector investment, exposing us all the more to the mining cliff. Credit and asset prices will bubble up more than they should, inhibiting a tradables recovery and ensuring further hollowing out of the industrial base.

The lack of budget discipline ensures ongoing fiscal instability as promises are repeatedly broken, spending is cut and taxes jacked chronically. This will be an ongoing weight upon private sector confidence as policy fails to cope. It will also be a red rag to the rent-seeking bull as each round of cuts and hikes involves public campaigns by those effected, retarding competition and productivity. With no honest narrative of the issues, government will be reduced to stakeholder management.

In sum, it means a longer and far more destructive path at risk of repeated recessions, the entrenching of rentier capitalism, lower than otherwise asset prices, falling standards of living and broad disenchantment. Whocouldanode?

Reproduced with permission from Macrobusiness.com.au

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Australia: Ford is the tip of the crisis

By Houses and Holes — cross-posted from Macrobusiness.com.au

It’s fascinating to watch the exit of Ford shake up commentary alliances and ideology.

The loon pond that dominates Australian business media is out in force with soothing words that Australian car manufacturing needs to be let go gently into that good night.

Bill Scales appears at the AFR to argue:

…..while it will be tempting to see this as a sign of the demise of Australian automotive manufacturing, it’s not. This decision is a direct result of the well-recognised, well-understood and deliberate decisions by Ford in Australia and the US.

However it does have important implications for public policy in Australia. This is a good example why governments should not provide company or industry- specific assistance. Governments and bureaucrats can never understand the strategic or commercial imperatives of individual businesses. So they cannot hope to successfully design company or industry-specific assistance programs that make any fundamental difference to the underlying economics of that company or industry. If the strategic direction or intent of a government policy for any company or any industry is not consistent with the strategic or operational direction of that company or industry, and it rarely is, then money provided to them by governments is likely to be wasted.

High priestess of the pond, Jennifer Hewitt, wants outright liquidation:

The national sympathy and attention given to 1200 Ford workers who will be out of a job in three years’ time shouldn’t obscure economic reality. Car manufacturing in Australia has been living on borrowed time – and permanently borrowed tax-payer money for far too long.

That can never be solved by additional government assistance or new industry plans or emotive rhetoric about how car manufacturing in Australia is so special. This only delays the inevitable.

But the response is part of the national semi-panic about the future of manufacturing in Australia. Both Julia Gillard and Tony Abbott stress the need for Australia to be a place that continues to “make” things. Just what new things should be made remains elusive. What is clear is it is will not be cars long term. That is despite the billions of dollars in government subsidies.

…the end of Ford manufacturing shouldn’t in itself be the sort of national crisis suggested by the massive reaction to the company’s announcement.

The Ford Falcon is an iconic loss rather than an economic one, a dream of the past rather than the future.

The AFR editorial and Judith Sloan at The Australian, card carrying members of the pond, are also happy to see Ford go. However, some of the more sane commentators are as well. Alan Mitchell at the AFR, John Durie at The Australian and Bernard Keane at Business Spectator are all for it.

What is missing, as usual, is the only thing that actually matters to the reader and the nation: context.

In 2009, the US faced an analogous decision about whether to let one of its big three auto-makers go to the wall (there were many differences as well). As the GFC tore its GDP to pieces, the government stepped into the breach and saved Chrysler, bankrupted the company, broke its union contracts, reorganised its cost base, sold much of it to FIAT and the company relaunched. Why did the global home of “free market capitalism” bother?

The cheap answer is to save jobs. But there is more to it than that. It is about productivity and not in the way you might think.

We all know that productivity is the key to national standards of living. Only through productivity growth do we sustainably increase our competitive advantage, capital formation, incomes and employment. But, I hear you ask, propping up dud car companies is bad for productivity, right?

Wrong, or at least, overly simplistic.

The issue is this. Manufacturing accounts for a huge slice of productivity potential in all economies. Without it, any economy will struggle to generate long term high productivity growth. Mechanisation, improved processes, innovation and technical progress are the bread and butter of productivity growth. They simply do not exist to the same extent in services, nor, for the most part, in mining (though the runoff in the boom will be good for the next few years). The following chart from McKinsey makes the point. Manufacturing contributes disproportionately to productivity, innovation and exports:
Productivity
This is the first question that Ford’s departure raises about Australia’s long term economic context. The car industry may or may not survive the shakeout but Australian manufacturing has already declined to only 7% of GDP and is clearly set to plunge further as capex expectations run at levels first seen in the 1980s.

Of the thirty developed economies in the world comprising the OECD, this level of contribution to GDP is last, tied with the tax haven of Luxembourg.

Our elite – the government, mining magnates and the media – have decided that manufacturing will be let go and we will instead rely entirely upon highly priced dirt and houses. Australia’s elite policy makers are engaged in a gigantic experiment that flies in the face of economic history.

The second question is more immediate. What our elite forget or ignore is that selling dirt is a highly cyclical business. Put simply, they never expected the current cycle to end. But it is. Right now. And is about to become a MASSIVE drag on the economy:
Mining Investment/GDP
Manufacturing is supposed to be one of those sectors picking up the slack along with other exports and more houses. Obviously the departure of Ford will damage any upside for a manufacturing bounce and it will also put a sizable dent in consumer confidence, making it harder for other sectors to rebound as well.

Short term and long, cyclically and structurally, this is a crisis, a crisis of our elite’s own making.

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RBA gambles on China – MacroBusiness

Glenn Stevens: Those at home [Australia] see this as well. As consumers, they have responded to the higher exchange rate with record levels of international travel. As producers, however, they also see, with increasing clarity, that the rise in the relative price of natural resources amounts to a global and epochal shift, which carries important implications for economic structure in Australia, as it does everywhere else. Some sectors of the economy will grow in importance as they invest and employ to take advantage of higher prices. Other sectors will get relatively smaller, particularly in the traded sector, as they face relatively lower prices for their products and competition for inputs from the stronger sectors. The exchange rate response to this shift in fundamentals is sending very clearly the signal to shift the industry mix, though this would occur at any exchange rate. The shift in relative prices is a shift in global prices that is more or less invariant to the level of the Australian dollar…..

Delusional Economics: And there is the China gamble laid bare for all to see. It is true that in relative pricing terms Australia’s income has increased but, as the Governor alludes to, the prices we are paying for cheaper imports is a hollowing out of some industries and a corresponding restructuring of the labour force. By not intervening via monetary and/or fiscal policy in the capital flows associated with the commodities boom the government and the RBA have made it clear that a restructure of the economy will be the outcome.

However, as I have pointed out in my analysis of Europe , and Mr Stevens goes on to say later in the speech, structural change is difficult and expensive. By allowing the economy to restructure in this way we are making a one-way bet on China. That is, if we’ve got it wrong on Beijing, we are in seriously deep trouble because there is no Plan B.

via RBA gambles on China – MacroBusiness.

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