August 11, 2012
I am ambivalent about lots of things, including, I have decided, the current state of the economy.
Now I had some economics training and wore at one point the appellation of economist. This largely meant that I went around forecasting the direction of interest rates, exchange rates, and the future state of the economy. In reality I had no idea at all about what any of these things were going to do. But I gave the impression of knowledge beyond the ken of ordinary mortals; albeit with caveats that I could fall back on if things went badly awry.
I also was fairly careful not to go out on a limb, which basically meant following the herd of other economists. None of those economists, I am satisfied, knew more than I did, so it is a mystery how particular consensuses emerged. I suppose it was through some collective process of osmosis.
The Reserve Bank held interest rates steady this month. That was expected. At the same time the money is on further falls in interest rates to counter a weakening economy. How do you square this with Bill Shorten describing the July employment numbers as a “gold medal performance” and Wayne Swan waxing lyrical on Australia’s economic performance? You might think that the next direction of interest rates is up.
Glenn Stevens also seems full of cockeyed optimism. In his Glass half full speech on 8 June, he contrasted the gloomy domestic view of our economy with foreign perceptions. He clearly thought those outside of Australia had a clearer view than those inside. He talked the economy up, as he did again on 24 July in his Lucky country speech. In that speech too foreigners had it right and the domestic “sceptics”, as he called them, had it wrong.
The question in my mind is that if Swan, Shorten and Stevens think everything is hunk-dory why are there sceptics around? Who are they; are they right? Should I be a cockeyed optimist or a doomsayer sceptic?
The unemployment rate dipped from 5.3 per cent to 5.2 per cent in July. Employment grew by 14,000. Apparently this was 10,000 more than economists had forecast. Sounds OK; however, there is a large sampling error in monthly employment numbers. For the statistically minded, the standard error for total employment numbers is 33,000 according to the ABS. Let us not get into distressing technical details but that means you can take the precise figure of 14,000 with a grain of salt. It is a wonder of nature, is it not, that economists in these circumstances coalesce around a specific figure.
A better way to look at the labour market is to take the trend figures over the past year. Sampling errors are then much less influential. These figures suggest that the economy is at best treading water. Employment has grown by only an anaemic 0.7 per cent from July 2011 to July 2012. Hours worked have remained absolutely flat; there has been no growth.
It is just another straw in the wind, but business bankruptcies were measurably higher in the March and June quarters of this year (by an average of about 10 per cent) when compared with the corresponding figures for last year. Neither should story after story of businesses in trouble be dismissed easily. The impending closure of the Kurnell oil refinery in Sydney and rationalisation at Qantas continue a recent pattern of high profile plant closures and layoffs.
You can also look at it this way. The competitive position of Australian industry has declined by 15 per cent over the past five years due to the rising trade-weighted value of the currency; and by more than 20 per cent for those companies principally transacting in US dollars. This hits all manufacturing industry and many service industries, including tourism. At the same time, world growth is sluggish, which reduces the demands for our exports of goods and services. Put into this mix a more rigid labour market, a new mining tax, and a new carbon tax of uncertain application and size and the immediate future might not turn out well. On the other hand as we economists say, it might.
Peter Smith will be the guest of a Quadrant dinner in Sydney on August 15. Details here…
The Quadrant Book of Poetry: 2001 - 2010
edited by Les Murray