The world is waiting for Europe to collapse, for China to slow or for the USA to hit the wall.

But the International Monetary Fund (IMF) says growth will be stronger.

'The fund has also raised its expectations for commodity prices, despite its growing concerns that troubles in Europe might spark a second world financial crisis.

'The fund has tipped that Australia's growth will rise from 3 per cent this year to 3.5 per cent in the year ahead, and argues, in revisions to its global forecasts, that the neighbouring Asian region will lift output by close to a record 9.2 per cent.

'The improved outlook is not confined to the emerging world, with the fund also upgrading its growth estimates for the US, Japan and Germany from annual estimates issued two months ago. However, it has tempered this optimism with a warning that Europe's financial instability could infect the rest of the world economy.

The strong jobs data released yesterday include the information (from avid Uren) that the mining boom has created 100,000 new jobs in the past three months.

All those clever folk talking of a rate cut as recently as last Tuesday should be choking on their cornflakes today.  They get paid to be so wrong!

Henry's free to air views, published ahead of the ABS release, are here.

And here is the latest contribution to Australian politics - truely awful.

Apologies, gentle readers, but a family funeral (not Henry's!) has interrupted the general flow of comment and opinion.

After an awkward 48 hours, the Rookwood Cementary (under new management) allowed the funeral after a serious consultation with a serious lawyer.  Having just watched 'Fierce Creatures', we were ready for a serious stoush.

We notice that Julia Gillard has reverted to the Howard solution for Asylum Seekers.  'Good guuuuurl!, Julia' is the jmudgment of Henry's female friends and rellies, not that any of them care much for the big picture.

Having stitched up the major miners, and gotten tough on Asylum Seekers, the final task for the lady Julia is to say 'climate change is crap' and wedge our Tony on climate change.

With Sydney suffering the coldest winter in 60 years, a judgment independently offered by an old nun in Boggabri this week, it seems the climate warming team are zip to 30, using tennis scoring as our guide.

Jobs data today will provide a more reliable guide to the state of the economy than the RBA statement on Tuesday, or in the newspapers.

Later: The ABS today announced strong jobs data.

In seasonally adjusted terms:

* Employment increased 45,900 (0.4%) to 11,100,700. Full-time employment increased 18,400 to 7,794,700 and part-time employment increased 27,500 to 3,306,000.
* Unemployment decreased 200 to 598,400. The number of persons looking for full-time work decreased 11,000 to 424,700 and the number of persons looking for part-time work increased 10,700 to 173,700.
* Unemployment rate remained at 5.1%. The male unemployment rate remained at 5.0% and the female unemployment rate decreased 0.1pts to 5.2%.
* Participation rate increased 0.1 pt to 65.2%.
* Aggregate monthly hours worked decreased 6.4 million hours (-0.4%) to 1,567.4 million hours.

More here.

How this fits with the handwringing of the retailers, or of the estate agents suddenly required to work for fewer and lower commissions, is uncertain.  Perhaps Australia is finally getting the message that hard work, high savings and avoidance of 'get rich quick' schemes is the road to personal as well as national financial success.

Time for a rate cut, Mr Uren?

Global uncertainty has seen falling share prices beyond normal ‘correction’.  Cooling domestic house markets have been reinforced by weak retail sales and other indications of caution by households, though jobs growth remains solid.  Without too much controversy or hand-wringing, the Reserve Bank board should resolve to keep monetary policy unchanged today.

The next big test for domestic monetary policy comes later this month with the release of data on consumer price inflation for the June quarter. There have been many signs of domestic inflation and if these are confirmed in late July the Reserve will be on the horns of a sharp dilemma, especially if asset inflation is flat or still falling and if global uncertainties continue to flash warning signals.

Commentators who call for rate cuts, or market participants betting on lower interest rates, must be people bedeviled by boredom.  It is easier for a Labor government to sack its leader and Prime minister than for the Reserve Bank to turn on a dime after a deliberate campaign to get rates back to neutral from a position of ‘emergency’ ease.  Such a backflip would deservedly earn for Australia the label of ‘sovereign risk’ that Treasury’s mad mining tax’n’subsidy scheme suggested to international investors.

More here from Henry's regular analysis of Australia's monetary policy.

The Reserve Bank, as predicted, 'sat neutral'.

Its governor, Glenn Stevens, concluded his statement as follows: 'The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. Pending further information about international and local conditions for demand and prices, the Board views this setting of monetary policy as appropriate'.

Read the full statement here.

China, like Australia, faces policy 'dilemmas'.

'CHINESE Premier Wen Jiabao says the country's economic policies "face increasing dilemmas".

'He said the impact of the global financial crisis is more serious than expected, but he reiterated that China won't hold back steps to restructure the economy for growth.

'The remarks were made after two purchasing managers' indexes issued last week showed China's manufacturing economy slowed in June and after China on Friday revised upward its gross domestic product growth for 2009.

'The GDP revision means China's year-to-year growth will have a higher comparison base for the second and following quarters, so the growth may be lower than economists' expectations.

Despite the widely expected slowdown, Mr Wen reiterated that China will continue its economic policies but increase their flexibility, to "solve current significant and urgent problems" while "laying foundations for stable and relatively fast economic growth of 2011 and in a longer term."

China's main problem, in Henry's humble opinion, is that it is stuck with an untenable currency regime, which means it cannot properly control its economy.

President Obama's policy dilemmas include how fast to cut government spending.  Too fast and he will stifle the recovery, and the Republicans still won't vote for him. Too slow and he gets Paul Krugman's vote and encourages inflation - now there's a painless way to fix the deficit!

Australia's policy dilemmas have sharpened in the past month, but the gnomes of Martin Place are grappling with global uncertainty against domestic inflation is the basic problem.

Tune in tomorrow for Henry's advice for the board of the Reserve Bank.

Julia Gillard has 'fixed' the mining tax, though her technocrats are struggling to get a consistent set of numbers.  Comes of being told to fix a mess, their hearts aren't in it really.

And Australia's iron lady is reportedly planning to 'get tough' with Asylun Seekers.

Oooops, there goes the bleeding heart vote!

Here's the clip of Amanda Bishop sending up Kevin Rudd's reputation as a slave driver - to the tune of Dolly Parton's 9 to 5 - which has seen her popularity sky rocket on You Tube and eerily predicted last week's leadership spill.

More here on this feisty lady.

Mining tax update

Predictably enough, the 300 odd small miners who were not part of the negotiations involving BHP, RIO and Xstrata are grumbling today. It turns out there is a net $10.5 billion to be extracted from the mining companies, and we are prepared to bet that more than a proportionate share will come from the three hundred rather than the big three.

Tony Abbott is not for turning, as explained here.

'Demonstrating yet again that he is a far better politician than Henry, Mr Abbott has said today that the Labor Party is 'addicted to spending', needs the $10.5 billion of revenue the modified tax will deliver and he intends that the next election will be a 'referendum on tax'.

A 'senior Labor cabinet minister' reportedly told Sky News that Labor was 'delighted' that Tony Abbott is promising to make the coming election a referendrum on tax.

Cartoon of the week

There is 'a lot of work to be done' - we've heard that before - but the big miners have agreed to a profits-based tax.

The tax will only be applied to coal and iron ore, which are the areas where 'super-profits' are being made.

(Coal seam gas is still to be dealt with, but that will be relatively easy. Gold, nickel and uranium are presumably either still to be dealt with after the election or exempt.  Pity the banks are not contributing to cutting the deficit, however, and what about the property developers?)

There is a higher hurdle for the definition of 'superprofit' - approximately 13 % if Henry heard right.

The rate of 'super-tax' is a mere 30 %, so does this mean another 30 % on top of 'normal' company tax?

The totally unbelievable 'refunds for losses' part of Treauury's scheme has been scrapped, meaning the offensive part-nationalisation story disappears.

Value of existing investments will be 'fully recognised', which deals with retrospectivity.

All in all, from an economist's perspective, not a bad compromise solution, and Don Argus is to chair a committee including Resources Minister Martin Ferguson, which makes The Don a 'super-minister' one assumes.

Why Kevin Rudd could not get to this point, neatly outlined  for him by this Henry on May 21, is an enduring mystery.  Not sketched for Ken Henry on a pub beer coaster is probably the underlying reason.

'Treasury would not allow it' is probably the immediate answer, and certainly Treasurer Wayne Swan repeatedly said he was not for turning.  In doing so he described the mining men as 'idiots or liars', or words to the effect.  Today's effort on Sky News - 'we said we'd consult, and that is what we did' - was nothing short of brilliant. As a friend once advised, if you have to eat a s**t sandwich, best to do it quickly and with a smile on your face.

One can confidently predict that Ken Henry's Treasury will be far less influential in the Gillard government. Indeed if the old-fashioned standards of responsibility were still being adhered to one might expect the resignation of the Treasury Secretary be at least offered.

What has been the response of the opposition?

If the big miners are willing to accept this compromise, can the Coalition sensibly say they will rescind the deal when/if elected, or oppose it in parliament now?

Australia is 'alone and friendless' in a dangerous world.

Earlier today, this blog advised Tony Abbott to claim victory and pursue other, more pressing, matters.

Demonstrating yet again that he is a far better politician than Henry, Mr Abbott has said today that the Labor Party is 'addicted to spending', needs the $10.5 billion of revenue the modified tax will deliver and he intends that the next election will be a 'referendum on tax'.

Game on, indeed!

The new financial year begins today with the news that Wall Street has suffered another sickening fall. China's substantial downward revision to its leading indicator data and a plunge in US home sales as artificial stimulus is withdrawn are the proximate factors, but the US economy has been struggling for two years now.

Other bad news is contained in Europe's sovereign debt crisis, which could yet turn into Europe's banking crisis.  There is also the debate over withdrawal of the extreme fiscal stimulus in the recessionary North Atlantic economies.

But in this writer's view, more important than all these factors is the conflict over the speed of fiscal consolidation and the fact that the more conservative Europeans want faster action than the Americans.  There is also the long-running fight between China and America over China's currency regime, and the limited concession of a 'faster crawl' by China is a long way short of the currency float (with more sustainable macroeconomic policies in both superpowers) which is the only lasting solution.

When the Titans squabble over the fundamentals of economic policy, business confidence cannot help but be damaged.  When business confidence is damaged, at least some employees of business, ie householders, will take defensive action for fear for their futures.  A downward spiral of poor confidence leading to depressed conditions and further falls in confidence is the clear risk.

Keynes, whose theories are finally being tested on a global stage, rightly placed great weight on 'animal spirits'.  After some initial euphoria as extreme fiscal and monetary stimulus was uniformly and quickly agreed upon, current second thoughts cannot fail to douse confidence.

Now Nobel Prize winner, Paul Krugman, has joined the debate. 'There was the Long Depression (following the panic of 1873), then the Great Depression (of the 1930s), and now we are in the early stages of a third depression. This one is primarily a failure of policy'.

'In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.'

The failure of policy is 'obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending'.

Krugman does not emphasise the policy backflips and disagreement, but the presumably direct effects of reduced government spending and higher taxes.  'Both the United States and Europe are well on their way toward Japan-style deflationary traps'.

Krugman bemoans the fact that: 'over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy'.

The fact is that monetary policy is still very easy in the USA and Europe, and this ease has promoted the substantial uplift in equity prices that has now been so decisively interrupted.

Krugman's alarm at initial moves to rein in extreme fiscal ease will add to the sense of Titans in conflict, not that he should be too concerned by that point.

His alarm adds to this writer's argument that the need for years of fiscal austerity, if debt levels are to be contained to managable levels, will make inflation seem like the least costly way to relieve debt.

The world may repeat on a global stage the mistakes of individual nations that have allowed their economies to spin out of control when debt levels become unmanagable.

Despite Krugman's assertion quoted above, concerns about inflation are not a recent development.  Before the global financial gridlock in September-October of 2008, there was a lot of concern about inflation, as the prices of food, petrol and in some nations housing kept rising despite the efforts of conservative central banks.

Our blog of June 12, 2008, 'Inflation goes global', produced an all-time record number of visits, and other articles on the same subject were also widely read.

This writer's hypothesis is that a major surge of inflation was interrupted by the financial turmoil of late 2008. As the turmoil subsides, inflation will reemerge as a serious and intractable problem, quite possibly combined with weak or even stagnant activity in major 'developing' nations, including the USA and Europe.

In fact, both Krugman and this writer may be right - imagine the market turmoil if the outlook becomes stagnation or worse with endemic global inflation.

Flip-flops in policy focus, and further battles among Titans, risk making a bad situation far, far worse.

Posted July 2 on The Australian's website.

Here is a modest example.

The latest Morgan Poll, featured on Chanel 7 News yesterday, says that if a Federal Election were held about now the L-NP would have had a narrow win.

The telephone Morgan Poll showed an L-NP primary vote of 45.5% (up 4.5% since the Face-to-Face Morgan Poll of June 19/20, 2010) well ahead of the ALP 38.5% (down 2.5%) with the Greens down 3.5% to 9%, Family First 1.5% (unchanged) and Independents/ Others up 1.5% to 5.5%.

The Roy Morgan Government Confidence Rating has risen strongly 125 (up 8pts) with 54.5% (up 4.5%) of Australians confident that Australia is ‘heading in the right direction,’ compared to 29.5% (down 3.5%) that say Australia is ‘heading in the wrong direction.’

The latest weekly Roy Morgan Consumer Confidence Rating for June 19/20, 2010 was up strongly, up 6.0pts to 123.6.

Gary Morgan said yesterday:

“Australians may find this latest Morgan Poll surprising – how could there be such a change when little over a week ago the Rudd Government had regained electoral support and Julia Gillard has a solid personal approval rating.

“The ALP’s decision to ‘dump’ Kevin Rudd and replace him with new Prime Minister Julia Gillard risks backfiring as the L-NP (51.5%, up 4.5% since June 19/20, 2010) have now taken a slight Two-Party Preferred lead over the ALP (48.5%, down 4.5%).

“Historically Australians don’t like to see their Prime Minister disparaged and the sudden public dumping of Kevin Rudd would deeply concern some electors. While Julia Gillard’s personal approval has not been seriously damaged, discussion of factions etc. has seen the ALP lose support.

“Julia Gillard has explained cogently she felt the need to step up as Leader because ‘A great Party had lost its way.’ The suggestion that the ALP had lost its way may have given Julia Gillard a good reason for her actions – but it raised real questions about the ALP – questions that electors were not even considering (Kevin Rudd looked strong).

“The change of Prime Minister occurred against a background of heightened concern about Taxation, especially the Mining ‘Super Profits’ Tax. Although it is early days for Julia Gillard, today’s telephone Morgan Poll shows that it is not merely enough for the ALP Government to change leaders to regain the support of the electorate — there need to be real moves made to end the uncertainty about the proposed Mining ‘Super Profits’ Tax.

“The challenge now is for Prime Minister Julia Gillard to demonstrate that the Government under her leadership ‘has found its way’ and that the new way reflects Australians’ real concerns – which special Roy Morgan Qualitative Research shows today are predominantly economic. The litmus test is the Mining ‘Super Profits’ Tax” – More detailed Qualitative Research will be released tomorrow.”
 
Full Table & Release Details: http://www.roymorgan.com/news/polls/2010/4519

It was another good year for commodity prices as China bounced back quickly from the slowing due to the North Atlantic recession.

Sarah-Jane Tasker reports that 'Strong price gains across base metals and bulk materials were recorded for the 2009-10 fiscal year, with a 40 per cent jump in base metals prices, a 26 per cent gain in oil markets and an 82 per cent gain in the iron ore industry'.

Iron ore was most heavily influenced by China, with 60 per cent of global seaborne trade last year landing in the economic powerhouse.

China also consumed one third of the base metals and one 10th of the world's oil.

New Prime minister, Julia Gillard, has played to the battlers with her vision of a 'smaller Australia'.  Where are the workers going to come from? is the cry of the miners and big business in general.  If Australia is to make the most of current opportunities, we need to grow rapidly, and surely we can afford the infrastructure to facilitate this.

Here is a modest proposal. Boat people, many already being housed in remote mining towns, should be granted permanent residency if they complete necessary training and have an unblemished work record after, say, five years in a job in a remote mining area. Provided of course they have shown serious signs of adopting the Australian way of life.  They would necessarily be paid the same wage as longer term Australians – this is no ‘cheap labor’ scheme.

Is this the 'tough but compassionate' policy Australia is groping for?

Meanwhile, Julia Gillard is racing to meet a Friday deadline to settle the damaging dispute over the new $12 billion mining tax say Dennis Shanahan and Matthew Franklin.

'The resources sector is demanding the new Prime Minister keep her promises to make genuine changes and have "meaningful negotiations" with miners.

'Both sides agree that if progress is not made by the end of the week, the damaging dispute will be reignited'.

(It is a relief that there is any agreement on this deeply divisive matter.)

This list links to Henry Thornton writers contributions since 2001 to the issues canvassed here.

Put 'immigaration', 'population' or 'asylum seekers' in the search box for more.

More on global economic policy

Yesterday's blog pointed out the 'deep divisions' on global economic policy.

Follow-up comes from Clive Crook who argues that fiscal disarray is 'the least of the G20’s sins'.

'Trade and bank capital rules are more important – but there is even less unity on these issues'.

Read on here if you subscribe to the Financial Times.

And the International Monetary Fund (IMF) estimates that global growth in five years would expand 2.5% faster if the U.S. and other wealthy countries slash budget deficits more deeply than they are planning, and if China and other large emerging countries do more to boost domestic consumption.

So much for naive Keynesianism.

Posted today on The Australian's website.

Mining growth and asylum-seekers

 
Henry Thornton IT was another good year for commodity prices as China bounced back quickly from a slowdown due to the North Atlantic recession.

The crisis of 2008 was caused in large part by over-lending and over-borrowing.

The 'sub-prime' lending and borrowing binge in the USA was just the tip of a very large iceberg - throughout the western world ratios of household and business debt to income have rocketed up. The rise has been especially strong in the past 30 years as the thrifty habits of the generation that lived through the Great Depression of the 1930s has worn off.  But the change in psychology was mightily helped by the inflation of the 1970s and the 1980s and tax laws that encouraged borrowing.  The great asset boom of the same period rewarded those who went into debt to buy assets and for three decades there was an apparently unending virtuous circle of rising debt rewarded by rising asset prices leading to more debt.

Central banks helped by slashing interest rates whenever the process faltered, most overtly in the USA where Greenspan took cash rates almost to zero, and in the current crisis Bernanke has out-done his irresponsible predecessor.

Fiscal policy responded dramatically also to the financial crisis of 2008 - first by the bailout of financial institutions likely to fail but also to support economic activity.

The net result has been another surge of borrowing and lending, borrowing by western governments and lending by professional investors in the west and major developing nations, notably of course China.

As a ratio to GDP, US private plus government debt has gone from 50 % in 1950 to nearly 300 % in 2008.  Trillion dollar deficits 'as far as the eye can see' means that this ratio will continue to rise, in the absence of a major backflip by US government for a decade or more.  Many western nations are deeper in debt than America.

Despite attempts to present a common front, G20 nations are divided on the issue of fiscal consolidation. The USA remains in the stimulation camp, while many European nations think it is time to begin consolidation.  Riots in Toronto as the G20 met and in nations like Greece forced to begin fiscal consolidation by its creditors show just how divided are views on the role of fiscal policy and removal of 'benefits' that have become viewed as entitlements.

Australians should be pleased that the process of debt inflation is nowhere as bad is it is in the major debtor nations, and neither have our interest rates been cut to dangerous levels.

But we have 'benefitted' from the the contagion of asset inflation and we shall suffer along with other nations if adjustment in the major debtor nations includes large drops in asset prices.

It is fair to say that there is no easy answer to the dilemma in which the world finds itself.

The Economist concludes a leader by saying: 'Weaning rich countries off their debt addiction will cause withdrawal symptoms. Austerity does not appeal to voters, who may work off their frustrations on politicians and (worse) foreigners. Mr Micawber’s phrase may be turned on its head again. When annual income is forced to exceed annual expenditure, the result may well be misery'.

Do not miss The Economist's special report on debt - 'Repent at leisure'.

The fierce debate about fiscal policy is one front in the battle for good economic governance.  Another is the battle to reform financial regulation.

The best report Henry has seen on the US attempt at this reform is in the Wall Street Journal, reprinted in today's Australian.

'After months of uncertainty about how the US would craft new rules, the agreement offers the clearest picture since the financial crisis of how markets and the government will interact for decades to come. The common thread: large financial companies are facing a tougher leash'.

It seems that there are also deep divisions - papered over of course - over the new rules for finance, mainly over the Eurozone proposal for a tax on banking to fund future bailouts.
 
Henry's views are here.  My core difference to the world's regulators is because continuous tightening of black letter law systematically erodes incentives to 'behave well'.

Another view.

  Courtesy Financial Times

'Fiscal disarray is the least of the G20’s sins' says Clive Crook.

'Trade and bank capital rules are more important – but there is even less unity on these issues'.

Read on here if you subscribe to the Financial Times.

Goodby Mr Rudd.

Sir Wellington Boote said it way back in early May, maintaining Henry's ability to be where the puck is going, not where it's at or where it was.

'At a Caucus meeting have someone call a 'spill motion'. This opens up all the positions of leadership. Drop Rudd and replace him with Julia Gillard. She is not my 'cup of tea' by a long mile. However, she has good public standing and can calmly unload all the detritus that passes for Rudd's policies ... a principal one being this Resource Rent Tax.
 
'I am in favor of this tax but I think it cannot be implemented without a long lead time spent in discussion and detailed adjustments with the mining companies. We need a government which knows how central mining is to the future of the country. The Chinese are not trying to capture our mines because they can't think of anything else to do. If we weaken the mining companies with a 'caravan raid' style of taxation a lot of the mining company shareholders will cut their losses and sell out to the Chinese. If we lose control of our mines we become eunuchs at the Court of the Chinese Emperor. We then miss out on our potential future and just follow along our old historical path  ... lap dogs for the British, lap dogs for the Americans and then, lap dogs for the Chinese. We will keep winning gold medals at the Olympics but they will own us'.