The Australian Economy: A Case Study in Weirdness

In Australia it looks like we’re doing more sinking than swimming…and we’re not just talking about the Olympics.

The Australian economy is certainly a case study in weirdness right now. There are two different conversations going on here. One says things are good…that the glass is half-full. The other says things are going pear-shaped. The glass is half-empty, and draining fast.

The business section of the Weekend Australian supported the latter view in a series of depressing articles.

‘Shell flags gas project delays’ reads one headline. Apparently Shell may delay some of its $17 billion investment pipeline because rising costs in Australia threatens forecast profitability. Shell isn’t the only company thinking along those lines. Oil and gas major Chevron will review its $43 billion Gorgon project due to the rising Aussie dollar and soaring costs.

BHP Billiton, the world’s largest resource company, indicated it will delay a decision to expand the massive Olympic Dam project for two years. High costs and suspect Chinese demand are the culprits.

Another article in the Weekend Australian pointed out all the bargains arising from a range of businesses falling into administration. As these companies liquidate their assets, those with cash have the potential to get some good deals. It’s a glass half-full for some.

In other weekend news, Australian brewer Foster’s Group, via its parent company SABMiller, reported a 13% fall in revenue for the 3 months to June. The glass is definitely half empty for Foster’s.

And today’s Financial Review reports that carmaker Ford’s exit from the local market is inevitable. The culprits? A strong Australian dollar and high costs. But it is not as simple as that either. Japanese carmakers have dealt with a strong currency and high wages for decades. But they invest and innovate to remain competitive.

In Australia, most investment goes into housing or mining projects. You get a sense the manufacturing sector is just hanging on. In any industry, if you don’t invest you die. Inadequate investment over many years is one of the primary reasons behind the slow death of Australian manufacturing.

One of the other reasons, although this is just anecdotal, is inflation. Costs in Australia just keep going up. Travellers to the country know it and those returning from overseas definitely know it. Funnily enough, the ones reporting on it don’t see it. The latest inflation rate is 1.2% per annum. Seriously.

Take a weekend breakfast out, for example. With a three year old daughter, we don’t attempt the feat anymore. A breakfast at a caf?should be relaxing and leisurely. Doing anything in a confined public space with a three-year-old is neither relaxing nor leisurely. It normally ends with a bunch of napkins soaking up half a hot chocolate on the table, with the other half smeared over the kid’s face.

So we’ll take someone else’s opinion. A top chef at a top Sydney restaurant reckons breakfast for two in the city evaporates at least two twenty dollar notes from his wallet. In his native New York, he reckons the same money would feed four people.

We’re not sure where he’s eating. It’s probably not representative of everyone’s experience. But I’m sure you get our drift, dear reader. Especially if you live in a capital city, the cost of living is very high in Australia. For the very highly paid, this is no big deal. But for the vast majority of people who have seen their wages stagnate while costs continue to rise? This is the source of people’s glass half empty view of the world.

Glenn Stevens‘ derisively made reference to the glass half empty crowd in a speech last week. This is the problem with economists. They see data and want to project that onto people. ‘The stats show we are doing better than everyone else…can’t you be happy with that?’

But there is a lot of stuff economic statistics don’t show. They don’t reflect the stress and the toll on relationships that long working hours can bring. When a society loads up on debt…the focus turns on servicing it at all costs. This leads to a completely inwardly focused and selfish society.

Credit booms create asset booms…and that creates winners and losers. The winners, through luck or canny investing, got in early and now have enough equity to survive the long fall out. Those who got in late don’t have enough equity and will struggle as the tide goes out.

The world has changed. Not because of anything we did or didn’t do. It’s changed because we have a system where a bunch of monetary high priests set the price of credit on a global scale to suit a very small sub-set of society. And in doing so they are in the process of ruining it for us all.


Greg Canavan
for Markets and Money

From the Archives…

How China is Still Making Steel, But There’s No Real Demand
27-07-2012 – Greg Canavan

Governor Glen Stevens and the Art of Central Bank Speech-making
26-07-2012 – Greg Canavan

Australian Mining Tax Policy to be Abolished, Pigs to Fly
25-07-2012 – Nick Hubble

24-07-2012 – Satyajit Das

Has Australia Blown the China Boom?
23-07-2012 – Greg Canavan

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "The Australian Economy: A Case Study in Weirdness"

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Good read Greg, however both the content and the opinions expressed by a variety of entities in the story are at least ten minutes behind the curve. That is, if their speculation goes on to wonder about Australia’s landing spot.

Read up on the “Dutch Disease” – where it will be explained that our current ailments were entirely predictable years ago. A before the event forecast, if you like.

Ergo, so much for today’s wise words from statisticians, economists, and soothsayers. The ‘after the event’ crowd

Michael Scheu
Hi Greg, here is my take of the situation. Costs in the construction industry have gone through the roof mainly through wages. When the difference between a fully qualified trades man and a trades assistant is a mere $1.40 there must be something wrong. There is a large proportion of low skilled trades assistants in the industry and they are well looked after by the unions. The unions in return have loyal members which gives them leverage in wage negotiations. It also discourages young people from taking up apprenticeships when they can earn 95% of the wages without going through… Read more »

The real victims are not the wage earners, many contributed to the mess by purchasing properties they couldn’t afford. Rather savers are being crucified by an out of control glen Stevens who has dropped rates well below inflation

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