How the End of Double Digit Credit Growth Affects the Australian Economy

We left yesterday’s Markets and Money wondering whether “something bigger” could be in the works for the world’s so-called democracies. “Something bigger” is in opposition to “more of the same”. More of the same implies that this latest financial crisis is just a run-of-the-mill bust after a run-of-the-mill boom. If that’s the case, there’s nothing to see here. Move along.

But if this crisis is different, then you can’t expect a return to normal. And if you can’t expect normal, what CAN you expect? That will be the topic of today’s Markets and Money. Plus, in one of today’s other articles we reveal where Barack Obama is really from, and show you what the oil market is doing to prepare for war with Iran.

First a quick apology to Australian Council of Trade Unions (ACTU) President Ged Kearney, whom we referred to last week as Mr Kearney. We’re not familiar with the name Ged or the ACTU. For that reason we referred to Ms Kearney as Mr Kearney. Our mistake and our apologies.

But as long as we’re on the subject, things aren’t looking good for unionised labour in Australia. Or any labour, really. Globalisation has lowered average wages in most Western countries. This wasn’t the case for Australia, until recently. And it’s not just blue-collar jobs. It’s any colour collar.

ANZ gave 492 workers their walking papers yesterday. The bank announced it would lay off a total of 1,000 middle managers and back office support staff by the end of September. UBS reckons the Australian banking sector could shed close to 7,000 jobs by the end of the year. Finance Sector Union President Leon Carter says over 10,000 jobs could be gone in the next 18 months.

Who knew the bankers had a union?

There is something going on here and we think we know the answer. But let’s proceed inductively, from particular observations to a general conclusion. Alcoa may fire 600 workers in Geelong. Toyota laid off 350 people this month. ANZ is shedding jobs. Manufacturers, retailers, and banks are all laying off employees. Is there a general conclusion you can reach from those specific observations?

The answer is “yes”. But you’re only likely to get it if you’re an Austrian economist, or at least familiar with Austrian economics. If you’re not, we’ll save you the trouble: the common thread to all these job layoffs is the end of double-digit credit expansion in the Australian economy.

You can see below that for nearly 10 years, credit growth expanded at double-digit rates in Australia. That whole party ended in 2007. It’s obvious that the first sector to be hit by slower credit growth is banking. If the banking system is creating less credit in the economy, you need fewer people to push that money around, lend it, track it, and collect on loans. This should tell you that the banking sector is going to be a lousy business for a long while. If it grows profits, it won’t be from lending, it will be from wealth management.

Credit and Broad Money Growth

The layoffs in manufacturing are also related to the end of double-digit credit growth, although more indirectly. Expanding credit leads to more consumer spending. More consumer spending (especially in the West) leads to ever more off shoring of manufacturing jobs. The global credit expansion of the last 20 years created jobs in the developing world and is now costing jobs in the developed world. The strong Australian dollar is also a factor here.

The retail sector is more complicated. Job losses in Aussie retail are also related to the strong dollar. It’s cheaper to buy goods online from America. But as Greg has been asking, why are retail prices so high in Australia? The answer is also related to credit growth.

Retail prices are high in Australia because property prices are high in Australia. The credit boom that made property investors rich has also led to much higher rents for small and medium-sized retailers. A retailer has to charge high prices just to pay the rent. Thus, Australia’s property boom is indirectly responsible for the high prices you pay for books, music, clothes, food, and gadgets.

CBRE, a global commercial real estate firm, reckons that rents on Chapel Street here in Melbourne increased by 6.1% in the last half of 2011. It will cost you from $600 to $1000 per square metre to rent a shop along one of Melbourne’s trendiest shopping districts. We assume that’s per year.

Now we don’t know much about running a retail business, but we can imagine that the only way to make a buck when your rents are so high is to charge high prices. This is probably why the shops on Chapel Street are increasingly filled with expensive clothes that only those with bad taste would buy.

High retail rental prices also explain why only large, boutique international brands can survive on these premier city shopping strips. And even these companies are not surviving by charging high prices. Their stores are big billboards for the brand, and probably don’t have the obligation to turn a profit for the corporate Mother Ship. It’s much easier to stay in business when making a profit isn’t required.

No one ever connects high retail prices in Australia with the property boom. But the two are joined at the hip. And as night follows day, unemployment will rise across the economy as high rents eat into business profit margins. Higher unemployment is not going to be good news for the banks and their big mortgage books, either.


Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "How the End of Double Digit Credit Growth Affects the Australian Economy"

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Dan, your analysis is spot on.
A friend of mine runs an Indian restaurant and often people complain about high cost of food at his place, not knowing that more than 50% of his takings goes in paying rent of the shop

Dan, I think you have hit the nail on the head. A small local retailer is being forced to close or re-locate at the end of their lease later this year because rents will increase by such a large amount. The business is marginal at present. With the higher rents and little prospect of higher sales or margins the owner would end up bankrupt. We have a number of empty buildings that have been for rent / for sale for a number of months and in some cases years .. you can only assume that the owner wants too much… Read more »

Here it comes. The deflation of the property market in Australia. The can that Rudd kicked down the road with his incentives and FHO grants has now come to a stop, and so… it begins!
Banks are cutting jobs and moving into a defensive position. They know something that the general public does not. Guess what that is?
Bad time are coming.

A witness

Well there goes buying things in shops!

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