Read the minutes for yourself here, and see the report on the six pessimistic amigos here. (Remember, a pessimist is an optimist with experience.)

Economists not in official captivity seem to be moving slowly toward the views of the six pessimistic amigos.

Last week, one such economist said there was a 20 % chance of a recession, and this week Saul Eslake raised the ante to 25 %.  Mining spokesperson and expert phrasemaker, Mitch Hooke, spoke of Australia being 'on a burning platform'. (AFR p 7)

Today, Judith Sloan disparaged the CEO of Holden's Australian business for suggesting that his business may need wage cuts to stay viable.

'My advice to Holden is simple', Ms Sloan wrote, 'produce cars that Australins want to buy at a price they are prepared to pay'. (The Oz, p1)

In the 1950s, a great British economist suggested the government should give the coal mines to the miners' union. With the state of Australia's costs relative to those of competitors and customers, some such radical action may be needed here to get the other comrades to cooperate.

What is the realistic worst case, fellow economists. Non-mining recession is already upon us, and before long we may all be on the 'burning platform' with Mitch Hooke and his mining mates.

(The analogy of spitting dummies is of course  potentially offensive to men, like the Toyota ad that has the woman car buyer/renter telling the woman behind the counter she has two children, her male partner (one of the two) described as 34 year old.  This is funny the first time but repeated frequently quickly becomes boring.  Imagine the furore if the gender roles were reversed in such an ad.)

But the gender wars is one thing, even worse is the state of the economy.  It has, it seems, gone from 'miracle economy' and 'best economy in the developed world' to 'battling headwinds' and, as Henry amongst others has warned, 'potential basket case'.

Henry Ergas in the Oz today provides a comparison of the performance of the Gillard government and the Howard government. He presents nine indicators of cost of living in what is in the case of Mr Howard his last year in office, or looks like being in the case of Ms Gillard, her last year in office.

The table is unfortunately not in the online version, linked here, but really speaks for itself.

We shall merely quote a few examples, plus one important example not in the table.

'John Howard fell victim to voters' perception that life was getting tougher. Yes, real incomes were increasing rapidly, and import prices falling. But people only buy plasma televisions infrequently, so reductions in their prices have little weight in our sense of disposable income, all the more as those purchases are discretionary. Rather, it is unavoidable purchases that matter; and with the price of necessities rising, Labor's cost of living campaign found fertile ground.

'So did the attack on Work Choices. Fear is a stronger, more primal, emotion than hope; and Work Choices was readily portrayed as Nightmare on Elm Street. Moreover, as Work Choices became increasingly complex, it proved easy for people to worry it was aimed at them - or might be in future.

'But however potent those anxieties were, they are even stronger now. Consider bills for utilities, which are impressed on every consumer's mind by their sheer size and regularity. In the Howard government's last year, electricity prices rose 6 per cent; this year they have increased by almost three times that. Indeed, the average annual electricity bill is nearly $1000 higher today than it was when Labor was elected: an 80 percent increase in real terms, outstripping average wages by a factor of four.

'Nor is it only utilities that have gone up. Charges for health and education rose 4 per cent in 2006-07; this year they have increased 6 per cent off a much higher base. And despite government rebates, child care costs have risen 8 per cent, and that rise could double as mandated increases in pay and staffing come into effect.

'Moreover, those price hikes are occurring at a time of slowing growth. Real per capita income, which was rising strongly at the end of the Howard era, has been falling for over a year, while per capita GDP is growing at barely one-tenth the rate of late 2007.

'With the Fair Work Act aggravating labour market rigidities, weak growth is translating into poorer employment outcomes. Already, unemployment is a third higher than in Howard's final months, while last week's employment data imply the number of jobs is rising at less than half the growth rate of the working-age population'.

Possibly the most important statistic is not quoted in the table. Ergas says: 'It is hardly surprising then that the number of employed Australians who say there is a chance that they may become unemployed is higher than at any time since December 2001, while the number who regard their job as safe is the lowest it has been since July 1997'.

Economic life is about to get far tougher in Australia.  There is a budget to fix, which will involve a measure of austerity and loss of some welfare support which some people have come to see as entitlements.

But the far larger challenge is fixing the double-digit cost disequilibrium of Australian industry. In previous times of crisis, this was tackled by most Australians sharing the pain.  If this is not done by direct attack on costs by all Australians accepting cuts to their incomes, as many did in the 1930s and again in the 1980s, it will happen by harsh market forces, at a far higher overall cost.

More here on these themes.

This is no ordinary election.  It is a serious three-way contest, with the Labor forces like the two battlers in the preliminary final before the big one, correctly called the Grand final.

Curiously, however, the Ruddites don't want to play, but rather to be awarded the prize (such as it is) by acclamation, while Gillard and her reportedly diminishing band of warriors keep doing run-throughs on the oval, demonstrating to the diminishing band of spectators that they are ready to play, if only the opposition will turn up.

Of course, on 14 September it will be game on, and on current trends the tiny band of Gillardites will face a united team full of fight and ready to govern.

Paul Kelly summarises, for those still willing to read the Footy Record, the likely state of the game to come.

'There are two mounting sentiments in the Labor caucus - a fading of faith in Gillard from her supporters and a weakening of conviction in the personal and political arguments against Kevin Rudd's recall.

'The dam wall of resistance to Rudd is starting to crack. Senior cabinet ministers have told Inquirer there is a sense of inevitability about a leadership change. The statements to this paper by Australian Workers Union chief Paul Howes constitute a tacit surrender from within Gillard's power base'. ...

'Labor has made too many enemies, some by accident but most deliberate. In the process, trust has been destroyed. It has sought to divide by class and gender. Its relations with almost every section of business have collapsed. It legislates for unions as a sectional interest. It has ineptly targeted the superannuation industry, the newspaper industry and companies relying on 457 visas for foreign workers.

'This week, incredibly, Gillard claimed that any Tony Abbott-led Coalition government would "banish women's voices from our political life" and ensure that "abortion again becomes the political plaything of men who think they know better".'  Read on here.

Like any fair-minded Australian, Henry is in total agreement that the WA shock-jock's probing into the sexual preference of the Prime minister's partner is totally unacceptable.  But surely the PM's clumsy attempt to accuse Mr Abbott and the Coalition of wanting to reopen the debate on abortion invited some sort of retaliation?  And more generally, like many other fair-minded Australians, Henry finds the lack of basic politeness and respect for the high offices of both Opposition leader and Prime minister to be deeply disappointing.

When you sow the wind, you invite the whirlwind.

Footy'n'economics'n'stuff

Caaaarlton!'s brave attempt to defeat Hawthorn last night ended with a narrow loss, but shows the once-mighty Blues are slowly pulling themselves up by their bootstraps. Here is a report.  Here is a report on the umpiring.

Henry hopes the Hawthorn player who (in Henry's view) recklessly threw his shoulder at Caaaarlton! captain Marc Murphy's head, and who later raised his elbow at another Caaarlton! player's head, gets at least four weeks on the sidelines.  (Evidence here). Remember, Blue-boys, what doesn't kill ya makes you stronger, as no lesser figure than the RBA guv'nor-in-waiting Philip Lowe implied when commenting on the influence of a high dollar on the parts of the economy being strangled by double-barrelled, double-digit cost disequilibrium.

More on Australia's economic malaise here.  

It has to be said that the apparent slight fall in the rate of unemployment announced this week is no guide to the coming economic meltdown.

It was made up of three elements: a fall in full-time jobs, a slightly smaller rise in part-time jobs and, most importantly, a reduction in the so-called participation rate - ie people leaving the workforce, many of whom are likely never to return.

Headlines in the Wall Street Journal make grueome reading.

* China's Yuan Weakens, Outlook Shifts as Economy Slows.
* US factories continue to struggle.
* [US] stocks extend losses for [another] week.
* Fed stimulus jitters weigh on Wall Street investors.

Karen Maley of the fin quotes an American guru who points out: 'Should the Fed lose control of assep prices, the downside risk would be terrifying. Most at risk would be low- and medium-quality credits, banks, commodity producers and any companies with negative cashflow'.  The feature story on the sacking of 20 % of Fairfax staff  may make your eyes water, gentle readers, especially if you are still in the 'miracle economy' camp.

Arts'n'crafts

Perth has underlined its entrepreneurial reputation by presenting a blockbuster exhibition of the great masters who changed the way we see the world.  Do not miss 'Van Gogh, Dali and Beyond: The World Reimagined' by Sebastian Smee, the visual arts critic for The Boston Globe, winner of the 2011 Pulitzer Prize for criticism, and a former national art critic for The Australian.

Image of the week.

 Courtesy The Fin.

This problem has been much discussed (EG here), but now it has arrived, far sooner than Henry expected.  Economists, even Henry, are notoriously deficient on matters of timing, especially in financial markets.  Usually we get too far ahead of the news, but sometimes, as now, markets leap ahead of prediction.

Jon Hilsenrath of WSJ fame says 'Federal Reserve officials have been trying to convince investors for weeks not to overreact when the central bank starts pulling back on its $85 billion-per-month bond-buying program. An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly it won’t mean that the Fed is anywhere near raising short-term interest rates.

Trouble is: 'Investors aren’t listening'.

'A wide range of indicators suggest that investors are starting to think the Fed might start raising short-term interest rates — now near zero — sooner than previously thought. Until recently many market indicators suggested investors expected the first rate increases in mid-2015, but now these indicators indicate investors think it could be sooner'.

Australia has its Federal election to be behind it, which the inevitable settling in of an Abbott government (if elected) will mean there is little reform ubderway before Christmas.

In the meantime, there is plenty of room for markets to provide a beating to equity portfolios. Not only will we feel poorer, we shall actually be poorer.

courtesy WSJ

News it ain't, but confirmation of the views of Henry's special correspondants Hissink and Raffan it is.

To quote only the most recent of these despatches from the front line:

* Hissink, May 2013: 'The large mining companies accept that their cumbersome bureaucratic structures hamper their efforts to find new mineral deposits, but the ever increasing regulatory burden is also hampering the smaller companies, and for the even smaller start-ups, which are the ones which actually have the entrepreneurial drive to look for [new] deposits, their end is upon us'.

* The Raff, May 2013: 'Make no mistake, the junior mining sector is facing the toughest times ever. It is not just the explorers that are affected, but so to are the service companies, drillers, consultants, and stockbrokers etc. But who cares?'

For the non-mining sector, things are worse, far worse.  As we noted earlier this month: 'The cost disequilibrium can be illustrated most clearly by the cancellation or postponement of many large mining projects.  But the health of many other industries is worse.  Ford closing its Australian operations, farmers bulldozing fruit trees, major declines of exports of wine and processed foods, tourist departures greatly outpacing tourist arrivals, the plight of small business generally and the difficulty of new graduates finding jobs all tell a story that has recently been documented more formally by Professor Ross Garnaut'.

Read on here.

So what is the government who got us into this parlous state doing about it? Not much, it seems.

Instead, the PM-for-now, Julia Gillard, is waxing ever shriller in her attempt to ignite the gender wars.

Sadly, for her and for her once great party, she is being dumped on from all and sundry, today most effectively by Jennifer Hewett in the fin: 'Little wonder the voters are increasingly turning off the Canberra version of the Mad Hatter’s Tea Party. It is always possible for Australian political debate to get even sillier. But these are surely new lows in stupidity.

'Julia Gillard’s absurd speech trying to link Tony Abbott to abortion rights and the political crime of too many blue ties was an embarrassment to most of her own colleagues, male or female. It is too clearly a sign of desperation from a leader who has squandered so much support in the community and in her own party. The transparent plan was an attempt to rally a group of women behind her and scare others into fearing an Abbott government would restrict abortion. It is indeed making the issue a “political plaything’’ – but of a woman Prime Minister under pressure rather than “of men who think they know better".'

Read on here.

Meanwhile, Bill Shorten is somewhere between a 'sh*t and a shiver' (one of Paul Keating's better descriptions of Old Silver's state of mind) on the issue of whether to back Julia, Kevin 'Blue tie' Rudd or himself in what many pundits see as the inevitable leadership shake up in that once great party.

Henry sincerely hopes that the leadership groups at Treasury and the RBA are turning their minds to the looming economic recession, likely to be especially gruesome as its cause will be double-digit, double-barrelled cost disequilibrium.  While there needs to be a massibe budgetary clean-up, this task, while difficult, is actually far easier that dealing with a huge cost disequilibrium.

Alert readers will recall that Old silver's special relationship with the unions helped do this in the mid 1980s, but his successor, leading a Labor rump in 2014, is highly unlikely to help the new government (if Tony Abbott is PM) achieve a similar result.

Meanwhile, on the gender wars, Henry is something of an expert given he has three children looking for jobs for 2014.

The gender point is this, and we offer this thought for a nice story to some aspiring young journalist.  Ask the big four banks and the major consulting firms to nominate the gender of their new hires.  Henry's evidence is that the gender mix of 2014 hirings is strongly biassed to females. Fair enough, ladies, the balance has to be restored sometime.  We sincerely hope, however, that one of the senior Labor wummin don't take up Gough's great quip, and suggest that, for unwanted young men, abortion could be made retrospective.

In case any female readers are inclined to describe Henry as a mysoginist pig, his record including promoting the first female to head a section in the RBA's Research Department, promoting one very competent woman to head the biggest department of a company he ran, appointing a female to a board he Chaired, and accepting the role of Chairman of a  listed company whose top three officers were wummin. (Sadly in that case, wummin numbers two and three were fired by the CEO shortly after Henry took over as Chairman.)

'THE first visit by Chinese President Xi Jinping to the US to meet Barack Obama has been hailed as a success, the pair agreeing to "forge new relations" between the world's most powerful nations.

'The talks between the two world leaders concluded in California yesterday, promising a new diplomatic and business approach between the US and China'.

Weekend news suggested China's growth may be slowing, and US jobs were not so robust as hoped and expected.

China's growth slowdown is unambiguously bad for Australia, increasing as it does downward pressure on our terms of trade and export prices, the source of the wonderful growth of our 'miracle economy' in the past decade.

Slower US recovery is a mixed blessing as it may allow the unorthodox monetary policy to run for longer. The effects of this will include increasing the dilemmas facing the RBA, which are now at last are receiving some recognition in the press, especially the AFR - as explained in the Long Weekend Sanity Break immediately below this blog.

The bottom line of both developments is that the Australian economy is in more trouble than Ned Kelly at Glen Rowan, ditto the government.

Aussie politics - the rats that roared, er ... squeaked

'LABOR MPs reeling from a string of devastating polls expect Julia Gillard to be finished as Prime Minister within two weeks' says the Oz.

Sensible political advisors still expect Australia's most stubborn wumman to hold on for dear life.

But a gracious handoever to a less unloved person might leave Ms Gillard with a happier place in Labor history than the smashing defeat indicated by current polls.

Read on here. Do not miss Paul Kelly on video, or several other interesting articles by the team at the Oz.

On a much needed lighter note, Henry Ergas suggests that the famous bananas be chosen.

'All of which points to a vacancy B1 and B2 ideally suit. At least they ask if we're thinking what they're thinking, demonstrating team work, electoral sensitivity and dexterity in reflective logic far outstripping that of the incumbents.

'Moreover, their intimate involvement with the shop on Cuddles Avenue would greatly enhance Labor's appreciation of small business: no tolerance there for debt and deficits!

'But, best of all, they already know the party's current anthem: "I'm a rat, I'm a rat, I'm a clever, clever rat". With that under their belt, how could they possibly go wrong?'

 Courtesy The Oz

Others economists mentioned are Ross Garnaut and Warwick McKibbin, old amigos from Australia's economic glory days of the 1980s.

Sadly we are now in far deeper trouble, with double-barrelled, double-digit cost disequilibrium to deal with.

A large currency depreciation would help, provided (a vital proviso) that domestic costs increases rise by far less than the Australian dollar depreciates.

This was achieved in the Great Depression of the 1930s and again during the 'Banana Republic' crisis of the nineteen eighties, but the adjustment now needed is nearer the former time than during the latter time.  Incomplete cost adjustment in the eighties required a severe recession to fix, so hold on to your hats, gentle readers.

Read more here.

And it seems two other former colleagues, Ted Evans and Bernie Fraser, share Henry's concerns. So now its the five amigos, six if you include Ken Henry. How many warnings does this government need?

And reports today say the Greens plan to use their assumed balance of power in the Senate to block Tony Abbott's deliberately mild IR reforms.

Unemployment rising sharply might, of course, cause the Green people to think again, but don't count on it as every Green Senator will have six year's tenure, absent a double-disillusion election.

98 days and counting

Politics heats up again as K Rudd leaps out of his box to explain to all and sundry that he is available to limit the electoral debacle that Gillard-Labor seem to be facing.

Government members are beginning to look like stunned mullets, and even the world's feistiest wummun seems to be losing it. Henry is even tempted to feel just a bit sorry for our Julia, but Mrs Thornton has told him to put such a silly idea aside.

Supporting a bloke for Martin Ferguson's seat of Batman in a partyroom with far too many blokes for political correctness seems like a foolish mistake when there are so many good wummun around.

Peter van Onselen gets Henry's award for political column of the week, with his vision of a busload of innocent Labor members going over a cliff.

He says: '... of the 50 or so lower house MPs for Labor who are strapped in and at serious risk of losing their jobs, remarkably about 35 of them would have voted for Gillard had there been a showdown earlier this year (according to a mash of numbers presented to me by both camps).

'That is how much hold powerbrokers have over grateful Labor MPs.

'I hope they've enjoyed the ride - the cliff is fast approaching'.

Read on here.

On the other hand, Rowan Dean from the fin, writing from some time in the future, reports on Julia Gillard's miraculous victory in Ausytalia's 2013 election.

'During a school visit in mid-June, a student threw a sandwich at the beleaguered Prime Minister. To the astonishment of all, she caught it with one hand. And then she ate it.

'Later that day, a rogue pair of Telstra sub-contractors “digging a quickie” for the national broadband network in the asbestos-strewn streets of Penrith struck, much to their surprise, an unlikely substance. Gold. Within days, rich new seams of gold, platinum and diamonds were being dug up daily in Telstra pits the length and breadth of the country, sparking what has since been called the Second Great Australian Gold Rush. Almost overnight, public and private debt was eradicated, the national accounts flourished and the IMF declared Australia to be the wealthiest nation on earth, awarding the country an unprecedented AAAAA rating. To wide applause, a delighted Treasurer Wayne Swan announced “surpluses to infinity and beyond” and promised no Australian need ever pay tax again. Or ever work again.

'Cheques for $9  million were swiftly sent to every citizen, with a multi-million dollar government advertising campaign explaining: “It’s Yours. Because You’re Worth It”.'

Read this ripper piece of satire here, if you have a valid  login.

Fiona Prior on alternative content at cimemas

'Before I start to explore the realities of alternative content in cinemas ... Met Operas, top international ballet company productions, world class theatre ... I have to drop a few aesthetic notches to share the latest Star Trek franchise offering:  JJ Abrams  Into the Darkness.  Read on here.

Footy'n'stuff

Henry was devastated on Friday night.  His beloved Caaaarlton! smashed Essendon in the first half, with Jarrod Waite completely outpointing (out-goaling?) the entire Essenton team to score 5 goals.

Henry and his border Collie Jack were about as happy as they get, and Mrs T and Jack went to bed confident that Saturday morning would be a happy time with Henry.

We do not know what Coach Hird said to his players, or what was in their rehydration therapy, but they came out a different team.

Everything they tried came off, and the fired-up Dons slowly but surely pegged back Caaaarlton!'s substantial lead.

Their halpess full back went to full forward and kicked almost as many goals as Mr Waite had kicked in the first half.

Their hapless full forward, practically useless in the first half, went to full back and limited Mr Waite to two futher goals.

The hapless Mr Kruezer, exhausted by rucking all day, was out-muscled by the Essendon rucks and Caaarlton!'s previously dominant mid-field lowered their colors.

Most puzzling, Eddie Betts' return from three weeks suspension (an unfair penalty in Henry's view) was hardly noticed and Mr Yarran (about the first player Henry would pick)  was unaccountably in the substitute's vest and came on only in the last quarter.

The third amigo, Mr Garlett, practically won the match on his own, but having a goal disallowed without even a review might just have changed the result.

Essendon kicked the goal to put them 5 points in front with about 60 seconds to go, but a blatent free kick to a Caaaarlton! forward right in front of goal with about 15 seconds to go failed to be awarded and that was the ballgame, gentle readers.

Image of the week

Courtesy The Oz

This could have been written by Henry if he had a better way with words, but in fact it is the conclusion of a recent article by Ambrose Evans-Pritchard.

Evans-Pritchard is a doughty fighter, one of Henry's great heros of journalism.

His recent article begins thus: 'Any country that has failed to lock in a self-sustaining recovery by now must expect to pay the price for the failings of its policy establishment, and some risk a slide into outright deflation'.

He is not writing about Australia, but are we not a clear example of such a country.

Not only have we failed to lock in a 'self-sustaining recovery' but we have not even tried to ensure that the non-mining industries are ready to take up the slack as the greatest mining boom on world history goes of the boil.

Such a trick was beyond what passes for Australia's current policy elite who, instead of thinking seriously about what Henry calls the 'realistic worst case', were gloating at their success in guiding the supposed 'miracle economy' to world champion (developed nation class) status.  This was due, we have been told repeatedly, to cash handouts to battlers (Treasury's great innovation, much of which boosted the gambling industry), batts in (then out of) the ceilings of said punters, new and mostly unnecessary school halls, or was it classrooms, the NBN (National Bloody Nonsense), which is well advanced at being well ahead of budget and well behind schedule, and now has turned toxic, with no blame attaching to the relevant minister or the government, naturally. Overall, complete failure to maintain the strong budget inherited from the Howard-Costello government, or even to stimulate the economy in ways that provided some boost to national productivity.

In an  national atmosphere of self-congratulation, boosterism gone mad and spending replacing international sport as the national obsession, costs rose faster than those in competitor and customer nations and the Australian dollar rose, creating double-barrelled, double-digit disequilibrium that has squezed most industries and has impacted even on the mining industry, which is cancelling or postponing projects as they bunker down for hard times ahead.

Now, far too late, Henry (Ken not Thornton) has the hide to warn us all that 'Australia [is] vulnerable to economic shocks'.

Gor blimey, mate, has this thought just come to you?  You are the bloke who boasted that you got the most useful advice on tac reform from a fellow drinker in a pub in North Queensland. Now you bewail the fact that 'Australia is ill-prepared for the downturn in the mining boom because it failed to continue with the economic reform agenda of the 1980s and 1990s'.

Did it never occur to you that stimulus, if it was needed when the GFC struck, might be better provided by getting on with the task of investing in the infrastructure that you now say is totally inadequate.  Yet it seems the gambling industry that you so zealously promoted in the name of 'stimulus' is one rare bright spot in a nation totally unprepared for the hard times that have already hit most Australians.

'Enough, already', I hear you cry.

So we return to Evans-Pritchard

“We see building evidence of a cyclical downturn,” said Fredrik Nerbrand, HSBC’s global asset guru. “We find it highly troubling that the eurozone is still marred in a recession at the same time as our cyclical indicators appear to have peaked.”

'The bank said there is a market “disconnect” between the world’s gloomy outlook and talk of tapering by the US Federal Reserve, the supposed moment when it starts to wind down its $85bn of monthly bond purchases.

'It is surprising to me that HSBC’s leading indicator has taken so long to buckle, since commodities topped in September and the Dutch CPB index of world trade contracted over the February-March period. Rarely has there ever been such an equity boom on such quicksand.  (See the warning about this here, thanks to Mr Evans-Pritchard, in January 2012!)

'Mr Nerbrand said slowing momentum “should send shivers down the spine of any investors that are long risk”. Yet markets are betting that central banks will come to the rescue yet again if need be. This may be so, but only after they have first struck a blow against moral hazard and demonstrated their distaste for asset bubbles. The central banks take their time. Mr Nerbrand says they will not act until the markets have already priced in a “sub-optimal outcome”, Canary Wharf dialect for a nasty sell-off'.

The US Fed has a massive problem on its hands as it tries to end the super-easy monetary policy that it believes saved the world from a great depression.

As discussed here earlier this week, the RBA has serious dilemmas of its own, and in all liklihood will have to wear some of the blame for the coming hard times.

But of all the official agencies, it has the least to apologise for - which will not leave it immune to criticism.  After all, achieving 'double-barrelled, double-digit disequilibrium' in Australia's competitiveness has to have something to do with monetary policy.

The optimists, perhaps merely sleepy, have been taking issue with Henry's view and that of others, like Professor Ross Garnaut who shares the gloom but learned early in life to be more guarded in his comments.

Today we present the views of David de Garis of the nab, whose comments on yesterday's national accounts follow.

In short, its a watershed, folks, and if Henry understands the meaning of watershed, it's all downhill from here.  (Watershed: 'A ridge of high land dividing two areas that are drained by different river systems'.)

'The headline 0.6 % GDP growth from today’s March quarter national accounts was only marginally shy of market expectations of 0.7 % and that of our own, revised up yesterday from 0.4 %.  Annual growth has now declined back into the 2s, at 2.5 %, from its 3.2 % pace at the end of last year.

'Underneath the overall growth headlines, a couple of stories are emerging.

'First, the tempo of household consumption did not accelerate anything approaching what the retail sales volume data had inferred.

'Consumption grew a still moderate 0.6 % in the quarter to be up 2.0% over the course of the last year, not far above population growth over that period and evidence of a cautious consumer. The 2.2 % growth in retail volumes in the quarter was offset by either outright declines in some other areas of purchases (eg. New cars, car operation costs, insurance), no doubt reflecting the discounting to attract more spending back into shops for once.  The consumer was much less upbeat than a bald reading of Q1 retail spending might have inferred.  Of course, we’ve seen flatter retail more recently, in March and April, together with brittle consumer sentiment of late.

'Dwelling investment was flat in the quarter, reflecting some increase in new home building and but lower renovation activity.  There are some hints of demand coming back of late, especially on the more traditional new home side, but it’s tentative and it’s unlikely other than to be a modest contributor to growth over the next year or so.

'Business investment contracted by 4.3 % in the quarter, now just 2.3 % above year earlier levels.  A year ago, business investment was rocketing along at an over 20 % annual rate and that’s now stalled.  Technically, while it’s possible that the mining investment growth story may have another quarter or so of temporary re-growth, that’s what it will be, only temporary.

'Mining investment contracted in Q1, reflected also in the large declines in plant, equipment and engineering construction spending and indeed in the outright decline in WA’s State Final Demand of 3.9 % in Q1.  WA would have had some buffer by exporting some of that slowdown to producers/ suppliers in other states and economies, also evident in the 12 % decline in capital goods imports.

'Another takeaway is the cushion from better net export volumes.  This came – and will continue to come – from declining imports that are very sensitive to shifts in private spending, and over time from higher export volumes, largely from iron ore for now, and later from LNG, but that’s a late 2014 and beyond story.  These will provide a big boost to export revenue, but also to measured productivity, new operational projects requiring a lot less manpower.

'On the industry side, the now familiar theme has continued into the March quarter.  Mining industry output rises, fuelling a rise in resource export shipments, but manufacturing contracted overall, with machinery and equipment industries and metal products taking the brunt from slower business investment and some pull-back in car sales and of course the still-debilitating competitive headwind from the $A.  Service industries were mixed, the transport industries doing better, possibly from higher internet purchase deliveries.

'Now at a watershed moment'.

'The economy is now at that watershed moment as the mining investment boom has either passed its peak or about to, transitioning to a lower growth plane, awaiting signs of a decisive pick up in other elements of domestic spending.

'NAB forecasts have been calling for the economy to grow by around 2¼ % this year, rising somewhat to around 2¾ % for 2014 based on our initial post-report analysis.  That growth assumes we get further positive flow through from monetary easing (eg housing) and some net forecast decline in the Australian dollar over time.  Even that growth though would be well within the economy’s potential to grow and not threaten overall inflationary pressures.

'We still expect the RBA to cut the cash rate again, to 2½ % in the period ahead, as the economy charts its course through this transitioning period.'

The estimable David de Garis reports on behalf of the economics team at nab.

'House prices gave up some further ground and at a faster rate in May than in April, prices across the capital cities down 1.2%, but remain 2.9% higher than year earlier levels thanks to rising prices through Q1.

'Melbourne (-2.1%/+2.1%) and Adelaide (-2.3%/-1.6%) had the largest falls in the month, despite higher-to-rising auction clearance rates (Melbourne 71.6% last weekend, Sydney 80.3%), evidence of greater vendor discounting to shift properties which across the capital cities is running at about 5% and 8.7% in Melbourne.

'Price changes across the other capitals were:  Sydney -1.0%/+3.9%, Brisbane -0.9%/+1.5%, Perth +1.0%/+6.4%, Hobart +2.2%/+2.0%, Darwin -3.5%/+4.7%, and Canberra -1.3%/+2.9%.  Rest of state prices (April) showed prices down 1.0%/-0.5%.

'It’s only of some limited relief' asserts De Garis, 'that the AiG PMI Manufacturing index for May was not as bad as the shocking 36.7 April, increasing to a still contractionary 43.8 in May.  That’s right in line with the March quarter average (43.4) with both production and new orders both popping their heads back above 40 again, production at 46.1 from 33.1 and new orders at 42.3 from 32.4.  Employment too was also less bad at 46.6, up from 39.3.

'The export orders component was only 28.5 after 24.5 in April.  Somewhat more encouraging, the sector showing some improvement was in the “Wood and paper products” industry, assisted quite possibly by the some flow through of higher housing activity.  Wage costs growth and input prices also eased, as some benefit to manufacturer margins.

'With the Australian dollar declining, inflation will become increasingly watched for signs of any pass through at the consumer level.  Today’s TD-MI CPI gauge rose 0.2%/2.2% after 0.3%/2.1%, year to rates still comfortably within the RBA’s 2-3% target range but monthly rates edging higher of late'.

And the late extra concerns commodity prices: 'Rounding out today’s local releases, this afternoon’s RBA commodity price index revealed a 2.6% decline in neutral currency SDR terms in May after a 0.9% decline in April.  The index was 8.6% lower than year earlier levels.

'While the big pullback in gold prices since mid-April and a decline over the past month or so in some of the bulk commodities, notably iron ore, have been right in the mix, the decline also reflected other falls, including for coal, base metals and many rural commodities.  Note also that for the some of the bulk commodities where there are contracts in place this has delayed the flow through, but this is only for a quarter or so.

'Using spot prices for bulk commodities, the RBA index would have declined by a faster 5.3% per cent in May in SDR terms, down 9.3 per cent over the past year'.

Henry's view is summed up by the lead paragraph of his approximately 121 st monthly paper since 2002 on  Australia's monetary policy. (With around 77 written as the RBA's Chief Economist from 1981, it feels a bit like a footballer playing his 198 th game, with a gap for psychological rehab after game 77.)

Australia is no longer the miracle economy, and seems to be heading almost heedless into very difficult times.  The Reserve Bank may feel constrained to help relieve the pain by cutting interest rates further but going too far in this direction will just increase the disequilibrium caused by the major difference in costs of doing business in Australia compared to doing business elsewhere.

Trouble is the word 'heedless'. With one or two notable exceptions, most observers seen to be still in 'miracle economy' mode.

Time will tell, comrades, but in Henry's view hard times are coming.

The RBA is on the horns of a difficult dilemma, and I do not envy their task today or in the next year or two.

More here.

Interest rates unchanged

The final, and key, paragraph in what was a relatively short announcement by RBA governor, Glenn Stevens, was:

'At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand'.

Read the full message here.

And for another view of it all, tune in to last week's Clarke and Dawe, courtesy the ABC.