Gee, it didn’t take long for the government’s budget projections to be exposed as lies, did it? That is, the incredibly hopeful and surplus making growth forecasts designed purely for a bit of reprieve in the polls have just been blown out of the water.
Yesterday, the Australian Bureau of Statistics (ABS) released data on actual and projected capital expenditure in the Australian economy. In short, the data was ugly. Here’s Peter Martin from the SMH.com:
‘Two weeks after the budget, Australia’s economic outlook is bleak.
‘Mining as well as non-mining firms are planning to slash investment in the year ahead, cutting total investment spending by 21 per cent.
‘The Bureau of Statistics survey conducted in April and May is at odds with the budget forecast of a lift in non-mining investment.
‘The survey of chief financial officers shows mining firms expect to cut investment 34 per cent, manufacturing firms 24 per cent, and other firms 6.1 per cent.’
That is a big fall…a recessionary fall. It makes a mockery of the government’s 3.25% economic growth forecast for 2016/17. It will be much, much worse than that.
Let’s have a look at the capital expenditure stats in detail. This data is extremely important because without business investment, you don’t have job growth. And without job growth you’re not going to see a sustainable increase in consumption — the driver of the modern economy.
First, I’ll show you the actual capital expenditure figures for the March quarter. In seasonally adjusted terms total capital expenditure fell a large 4.4% in the March quarter. In the year to 31 March, it fell 5.3%.
For the quarter, mining investment fell 4.1%, manufacturing investment fell a whopping 9.4%, while investment in ‘other selected industries’ fell 4.2%. So much for low interest rates encouraging borrowing and investment.
While the March quarter figures are bad, it’s only going to get worse. The ABS also released a survey of investment intentions in the year ahead. As pointed out in the quote above, mining, manufacturing and other industries all plan on investing much less in the 2015/16 financial year.
Then, in the year after that, you can look forward to the exit of the car manufacturing industry and the completion of all the big ticket resource projects. That’s why I think you’ll see some big infrastructure announcements to plug the gaps.
The great hope of the RBA was that lower interest rates would spur investment in housing large enough to offset the massive decline in mining investment. It was never going to happen. And these figures show it’s not going to happen.
I’ve been arguing for some time that Australia is in a real mess. I don’t do it for the sport of it. I don’t do it to fear-monger. I do it as a concerned Aussie — concerned about the direction this country is taking and concerned about the utter economic mismanagement we’re subject to.
I’ve also argued that we won’t get genuine reform until we have a genuine crisis. Well, a genuine crisis is on its way. Whether it hits this year, next year or even the year after that, it’s a moot point.
What is almost certain is that our economic trajectory is assured. We have a completely inept government (on both sides, I might add) unable to see past their noses and understand the looming problems. Anything they try to do now will just make things worse.
That is, efforts to improve things over the longer term, via productivity enhancing structural reform, will cause short term pain. Governments have no appetite for that.
Instead, they’ll go for short term fixes that build and build on the longer term pain we’re going to suffer. A good example is the budget incentives for small business to spend. That’s great in the short term, but what happens after that? Red tape and relatively high tax rates will still impede business formation.
An Aussie mate of mine lives in London. He is self-employed (by his company) and gets contract work with the big investment banks’ IT departments. The company tax rate in the UK is 20%. In Australia it’s 30%. That’s 50% higher than the UK. Singapore, much closer to home, has a corporate tax rate of just 17%!
We’re simply not competing on a global scale. We hitched our wagon to China 15 years ago and went for a coffee while everyone else got on with it. We constantly looked at the short term and forgot about the long term. Well, now the long term is bearing down upon us…and still we try to ignore it.
So expect bigger fiscal deficits and more interest rate cuts to come. Anything to help keep our head in the sand for just a little bit longer — or until the next election.
But for Australia, the day of reckoning will come. Our net foreign debt levels will go close to hitting $1 trillion this year. While the economy slows and national income growth grinds to a halt, we’re maintaining our standard of living by borrowing more and more.
In the global search for yield and complete ignorance of risk, our creditors keep lending to us, mainly via the banking sector. The funds then go to the household sector, which bids up the price of housing and clocks the gains up as ‘wealth’.
But as Greece knows only too well, when you’re a debtor you don’t hold too many cards when the proverbial hits the fan.
In Australia’s case, if our creditors decide to reassess the risk of ‘buying Australia’, two things will happen. Our dollar will be the first to adjust lower. That’s already happening. But it’s happening too slowly.
The dollar adjusts lower when the supply of funds coming into Australia doesn’t meet the demand. A lower dollar is the price mechanism to balance the market. It allows foreigners to get more bang for their buck, euro or yen.
The other adjustment mechanism is market interest rates. A sharply lower dollar will pretty quickly feed through to higher inflation. If the RBA ignores this and keeps cutting interest rates anyway, foreigners might decide to demand higher compensation (higher interest rates) for lending to a country that appears to be losing the plot.
Loss of faith in a central bank or confidence in a currency means the cost to hedge any cross border investment becomes too great — it no longer compensates for the interest rate on offer. So the creditor asks for a higher interest rate as well.
When that happens, it’s game over for our highly leveraged economy. That’s probably still a year or so away. In the meantime expect more interest rate cuts.
That, along with a lower dollar, should prove beneficial for the market. Indeed, the ASX 200 celebrated our impending recession with a near 50 point burst higher at the open this morning.
But with the real economy now getting much less bang for its buck from lower interest rates, the question is what sector will benefit the most?
I’m betting on something non-household sector related. Something exposed to a growing global trend. Click here for my special report on the topic.
For Markets and Money