Just How Bad Is The Economic Situation In Australia?

It’s not a very scientific analysis, I know, but sometimes raw observations can be the most powerful. I spent an hour wandering around Westfield Southland tonight, and what I saw got me thinking about a whole slew of layman’s economic “indicators.”

For those who aren’t local, Southland is the second-largest shopping centre in Melbourne, after Chadstone (also in Melbourne); it is located in Cheltenham, about 14km south of the CBD, and is the eighth-largest shopping centre in Australia (Chadstone, incidentally, is the largest in the country).

I haven’t been to Southland on a Friday night for a couple of years; typically my visits there are on a Saturday to shop at Coles. But historically, a Friday night visit to Southland involves half an hour of looking for a car park, followed by the crush of making one’s way through the hordes of people who descend on the place for whatever reason at the end of the working week.

What I saw tonight was stunning.

The car park was, without exaggeration, half-full at most; even the undercover spaces, on a cold and squally Melbourne night, were easily snapped up — even the ones closest to the entry to the shopping mall itself.

Walking from one end of the centre to the other, then back again on a different level, I noticed not only how few people seemed to be around — not much of a surprise, given the state of the car park — but also how many shops were, at 7pm, either closed or closing: right at what should be the peak of the evening shopping rush.

Many of the shops that were open were placarded with sales and discounts for this and that…but I also noticed that quite a few retail spaces were vacant, and that quite a few others had turned over very recently — also a sign that business conditions aren’t the best.

And on the way back to my car, I stopped in at Coles to buy a packet of cigarettes, because I’d left mine at home; rather than queueing long enough to get nicotine withdrawal symptoms, I saw that not only were there only three checkouts open (in quite a big supermarket), but that nobody was queueing at any of them.

So Southland was a virtual ghost town; it says pretty clearly to me that people aren’t spending money because they’re at home, and if people aren’t spending money, it’s a telling pointer to the state of the economy.

And it got me to thinking about everything else that’s going on economically in Australia at present — and the picture isn’t pretty.

Official government figures from Treasury tell us that the economy is, indeed, growing; I have suspected for quite some time now that if the minerals and energy sector of the economy were to be excluded, then the remainder of the system would actually be in heavy recession.

So let’s look at some of the other indicators; you draw your own conclusions.

Job losses seem to be rocketing at present; between companies going into voluntary administration/receivership/liquidation, and companies simply sacking staff in the name of restructures and finding efficiencies, the stream of such stories in the media is now almost a multiple event on a daily basis — just like at the beginning of the 1991-1992 recession.

It’s true that some companies shedding staff do so for a reason; Qantas recently announced it would axe 400 maintenance jobs. But this was due to the retirement of old aircraft, whose replacements require little or no heavy maintenance, which has made those jobs redundant.

On the other hand, an exponentially greater number of businesses are simply failing; just today a Melbourne company called Brides of Melbourne went into receivership, with the loss of 16 jobs. Hundreds of customers are believed to be collectively at risk of losing hundreds of thousands of dollars in deposits, progress payments and even finished goods, to say nothing of hundreds of wedding plans that have probably been thrown into chaos as a result.

And anecdotally, just as these jobs are disappearing, it seems there isn’t a great deal around to replace them; a common complaint increasingly heard in social and business circles is that there isn’t a great deal of work on offer at present (which refers to the same type of work as people ordinarily do; of course there’s a lot of work to be found, but it’s often a different type of job and/or remunerated at a vastly inferior level).

Moving on, the residential property market is stagnant, and has been for some time; reports of house prices falling for the past year in most major markets seem to be just that: reports. First home buyers are still locked out of the market to a great extent, whilst intending vendors are sitting on their assets until they can realise greater capital growth from them.

The high Australian dollar is hurting a lot of businesses, and especially those reliant on imports; it has also cruelled domestic tourism and hospitality to a considerable degree, and that industry — which employs over a million people — is doing it tough.

Yet one of the things a high Australian dollar should redress is the price of fuel; as I have said before, the cost of oil is 40% below its 2008 peak, and the dollar is 10-15% higher than at the same time, yet petrol prices are equivalent to their all-time peak of four years ago.

The latest ACCC investigation into price collusion can be confidently expected to identify and rectify nothing; the ACCC’s investigations into the retail petroleum companies never do.

And living costs are higher than they have ever been; rocketing prices for gas, electricity, petrol and water are one thing, but they feed into the price of everything else we buy. Fuel especially — everything needs to be transported.

I was discussing the cost of living some time ago with some of my associates — all of whom, myself included, have travelled — and we concluded that it is now probably cheaper to live in the United Kingdom than it is in Australia when all of these factors are taken into account. And that is an indictment — a very heavy indictment.

Wage growth — which grew strongly in real terms from 2000 until the onset of the GFC in August 2008 — has stagnated, even falling in many industries.

Interest rate movements are a red herring, as it is estimated officially that only one in three Australian households have a mortgage; but to the extent they are a factor, banks increasing rates by more than an official movement on the way up, but reducing them by less than the official movement on the way down, strips more money from households on the dubious pretext of bridging shortfalls in “funding costs.”

And for those who do not own homes outright or have a mortgage, most rent; and residential rents have exploded in the past ten years to the point they have more than doubled, in real terms, in some areas of major capital and regional city markets.

Add to this a MRRT (the “mining tax”) which the Gillard government will shortly impose; whilst not denying the profitability of the mining sector, this means — in actual terms — that gross profit dollars that pay mine workers as highly as they do will begin to dry up; similarly, infrastructure spending by mining companies will contract, just to name a couple of examples.

Add to this a carbon tax of $23 per tonne from 1 July, levied on the “500 biggest polluters” as designated by an arm’s-length government agency; it doesn’t take an economics degree to understand that the more money withdrawn from a market system in the form of taxation means that less money will remain in that system to be otherwise used or deployed free of government interference, intervention of influence.

And it doesn’t take an economics degree to see what the coming federal budget will achieve, either.

Treasurer Wayne Swan is getting ready to rip $40 billion in recurrent spending out of the budget when he delivers it next week to achieve the paper surplus he is so obsessed with; pulling that amount of money out of the economy is only going to increase the financial strain on individuals, families, small businesses, and local communities.

I’m sure there are other “indicators” I haven’t included here — some of which I will no doubt think of as soon as I publish this article — please feel free to put them in your comments, folks, because this is a large discussion subject in which some points are going to be overlooked by some of us, and highlighted by others.

But I return to my opening point: just how bad is the economic situation in Australia?

I think it’s pretty bleak; in fact, I wouldn’t be at all surprised if we follow Europe into recession later this year.

Quite aside from the points I have covered here, there are other, more ominous warning signs. China has recently agreed to begin to appreciate its currency against those of its trading partners, whilst slowing its overall rate of economic growth; both movements have the potential to inflict horrendous damage on the Australian economy as China pays less in real terms for what it buys, and then begins to reduce the actual volumes of what it buys.

Europe and America remain large trading partners with Australia in their own right; yet Europe is heading back into the depths of severe recession, whilst the USA seems mired in economic growth so sluggish it barely makes a mark on that country’s manufacturing and employment figures, let alone increasing demands for goods and services from external markets like Australia.

And to cap it, the risk of military misadventure (North Korea, Iran etc) — were such an event to materialise — would be enough to send shock waves through already rattled world markets to which Australia is openly and highly exposed to.

Official figures are one thing (like inflation running at 1.6%, for example, because the price of cyclone-ravaged bananas is no longer a price pressure, and its removal masks the effects of a 25 cent per litre rise in the price of petrol), but reality is quite another matter altogether.

I don’t think the Australian economy is in very good shape at all, and I think that’s something that is likely to deteriorate in the next six to twelve months.

At some point, under the pressures in the system and the drain on those who sustain it monetarily — Australian consumers — something has to give.

I think the result is likely to be a fairly hefty recession.

Those are my thoughts; what do others think?

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3 thoughts on “Just How Bad Is The Economic Situation In Australia?

  1. As a scientist it was hammered into my ilk that evaluation by anecdote is a risky trail to follow. Nevertheless there is an uncertainty and uncomfortableness in the electorate about the future. It is certainly not being helped by the political negativity and manouvring, and the current media penchant for embellishing the news with portents of doom. It is also not helped by Australians’ overcommittment on mortgages for Macmansions and flogging the hell out of their credit cards without due consideration for the fact that even the best of times don’t last. Australia has an indebtedness of 20% if its gross wealth.
    Its a fact that overall our economy is one hell of a lot better than that of other countries and that on most measures Australian’s are well up there with personal wealth and in wellbeing. There are certainly pockets in the economy where things are not going so well and like all things, the application of the standard deviation curve means that our economy also contains in all aspects, the really bloody good and, the really bloody bad. Ask yourself the question: ‘Which economy would I prefer to be in at this particular time’. I suspect that your answer would be Australia’s! It’s certainly mine. The Gini index, the international wealth data and the recent report in the SMH on the cost of living all point to a country that is pretty well off.
    Were I sitting on a large mortgage, with little equity in my McMansion, paying back just interest on credit card debt, and looking at a world that has been thoroughly stuffed by the US and European profligacy and mismanagement, i think I’d be a bit cautious about spending money on anything but essentials too. Especially with a bunch of politicians and media people all running about saying loudly: “We’ll all be rooned, before this year is out!’
    Liked your post.

  2. Yale,
    Nice post. I agree with you that things in the Australian economy are precariously balanced & a small ‘push’ in the form of a European recession &/or Chinese ‘slowdown’. Two points I would like to add:
    1 – the property price declines are very real. The reason 1st home buyers remain locked out is that up to now these declines are confined to the top end of the market, where 1st home owners can’t get into with or without a 10% price drop and the ‘holiday home’ belts (e.g. Hearvy Bay in Queensland & Mandura in WA) where 1st home buyers don’t want to live, being too far away from their work places to comfortably commute.
    2 – bank funding costs are also real. Most people look at offshore interest rates and wonder how can this be so. This is because our banks aren’t borrowing at retail rates, they are borrowing at wholesale rates from Institutional investors who take a dim view in the weight of Mortgage loans on our banks’ balance sheets & demand a higher return for the perceived risk. Additionally, the funding the banks are trying to replace was typically borrowed pre GFC, when Mortgaged backed securities were all the rage and the world was awash with cheap funding.

    • Welcome, Highett Hooligan; I do agree with your point about house prices, which is complementary to mine — asset price deflation in the residential housing market is indeed skewed to the top end of the market, with the result first home buyers still can’t get into the market without going to places like Hervey Bay, as you say, whilst those sitting on the most expensively-priced houses are sitting on them because they want a better return.

      I also have no problem with your assertion that the issue of growing funding costs for major lenders is legitimate, nor with the (correct) rationale you offer; the problem I have with this issue is that it is nonetheless being used as yet another tool by banks to increase profit margins — and if there is any doubt on this, consider that with the exception of one rogue result posted last week, every one of the big four banks has posted consistently increased profits every six months since the so-called GFC eventuated. The gripe of the banks may be legitimate, but it does them no favours to be seen to be profiteering so flagrantly when the large majority of their customers are already contributing more than is reasonable to the bottom lines of those institutions.

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