Let’s look at what Glenn Stevens had to say yesterday. It was a thoughtful speech, even if he avoided mentioning the elephant in the room, China. You’ll see why it’s a crucial omission in a moment.
Stevens titled his speech ‘Economic Policy after the Booms’, the booms being the global credit boom and Australia’s mining boom.
In relation to the mining boom, he says there are three phases. The first one is rising commodity prices and rising terms of trade. The second phase attempts to take advantage of rising prices by investing in future production increases. This is the investment boom that has just ended.
‘Resource sector investment rose from an average of about 2 per cent of GDP, where it had spent most of the previous 50 years, to peak at about 8 per cent. That big rise is now over, and a fall is in prospect, with uncertain timing. It could be quite a big fall in due course.’
But don’t fear, because the third phase is here…or approaching anyway. The third phase of the boom is when all the investments from the second phase pay off, and we see rising levels of production.
‘The third phase is now under way, in which we will see investment spending fall back, but a lift in volumes shipped of the various commodities. The latter has already started – for iron ore, volumes are rising at about 15 per cent per year – but shipments will probably increase further yet for some time and then stay high.’
‘In that third phase, real GDP will get a lift. National income measured in current dollars will also get a lift from the higher volumes, but that is likely to be offset in part, at least, by lower prices.’
But here’s where things get interesting. Stevens, like all central bankers, never assumes the possibility that a credit bubble could lead to malinvestments. For example, he doesn’t acknowledge that China’s credit boom may have sent a false signal to Australian iron ore miners. He therefore assumes that all the newly installed, and future, iron ore capacity will always have a home.
He’s got a point, to be honest. Production will always find a home. But price is the big swing factor. And once China (which he didn’t mention once in his speech) gets over its dependence on investment spending, iron ore prices will plummet. That will have an impact on future production.
Stevens then explains how the third phase is less economically and labour intensive than the second phase, and that other parts of the economy will need to pick up the slack. He’d like to see business and housing investment pick up the slack, and for that tricky little intangible ‘confidence’ to improve.
Clearly this is what he’s hoping lower interest rates will achieve. But it’s not really doing so at the moment, which hints there are more structural issues at play. We would argue that these are deeper, global structural issues affecting people’s behaviour. In everyday parlance, it reflects an innate feeling that things are pretty screwed up around the world, and that the people in charge really have no idea what they’re doing as they try to unscrew them.
This brings us to the second part of Stevens’ speech, where he focusses on the credit boom. He shows us two cool (well, sort of) graphs that sum up the post-credit bubble bust world pretty nicely. This is what Stevens had to say about the first graph:
‘Real consumption per person had risen faster than real income per person for 30 years, from the mid 1970s until about 2005. (Only the last third of that period is shown here.) That changed some years ago now, and after a noticeable fall in consumption in late 2008 and early 2009, spending and income have grown roughly on parallel tracks. Since 2009, trend growth in per capita consumption has been about 1.4 per cent per annum, half what it had been from 1995 to 2005.’
In other words, since 2009 there has been a structural shift towards lower consumption growth. Given that it was households taking on more debt, which added to spending power and consumption in the pre-GFC years, you wouldn’t expect consumption growth to resume at historical rates for many years to come. Neither does Stevens.
The following chart explains why:
Since the GFC, asset growth has fallen well below trend. (An overstated trend, by the way, given a secular global credit bubble produced the gains that defined the trend). This has impacted consumption, savings etc.
The yellow line in the middle of the chart, ‘non-financial assets’, has performed worse than ‘financial assets’. And this is where the property bulls might come in for a shock. Stevens says ‘the value of non-financial assets in particular – mainly dwellings – is lower today in real per person terms than it was five years ago.’
Luckily we live in a nominal dollar world and most people will go on happily ignoring such econospeak. But the message, even though Stevens didn’t say it directly, is that thanks to the crushing weight (cost) of excessive debt levels, real per capita dwelling prices are lower now than they were five years ago.
And he doesn’t anticipate a return to the halcyon days of rising property prices. ‘…it would seem unlikely that we could bank on a resumption of sustained growth in assets, in real per person terms, of 7 per cent per year over the next few years.’
And that’s assuming all goes swimmingly with the Elephant in the room…
for Markets and Money
From the Archives…
Has the Chinese Economy Hit the Great Wall?
26-07-13 – Bill Bonner
Crisis, Capital Controls, and Accidents of Birth
25-07-13 – Doug Casey
Australia’s Mysterious Natural Gas Shortage
24-07-13 – Nick Hubble
Bernanke’s QE Train Wreck That’s Heading Our Way
23-07-13 – Vern Gowdie
The Misallocated Savings of the Chinese Banking System
22-07-13 – Dan Denning