Saturday Sanity Break, 6 May 2017 - Economic outlook and risks
In Australia, business confidence is high and the latest RBA economic report provides a cheery outlook. Read it for yourself here. Key predictions have inflation rising into the preferred zone of 2 to 3 % and growth reaching 2.75 to 3.75 by early 2018. It must be noted that a review by Adrian Pagan concluded that RBA forecasts have been excessively optimistic for the previous decade 0 how worrying, comrades.
Despite official optimism, Treasurer Scott Morrison fails to look cheery or act like a winner, and many experienced Australians are deeply concerned at the real state of Australia's economy, especially its overheated housing markets and distinctly underheated labor markets.
Check out Henry's 'Ten Unsustainable Trends' here.
Finally some policy actions have appeared. The budget on Tuesday will tell its new stories of 'Good' and 'Bad' debt and commendable attempts to reduce welfare rorts. The generous education package presented this week - actually unaffordable - has produced Labor sneers and a storm of complaints from actual or assumed losers. It seems like the earlier emphasis on 'housing affordability' has lost momentum, unless we are about to see some limits to negative gearing. (Why the government has not tried to achieve some political convergence with Labor on this is a major mistake in my view.)
Australia's budget deficit and national debt will continue to grow, and will eventually create serious 'headwinds' to further growth. But a larger and even more worrying immediate debt is that by households. Soon this will be 2x average household income. Assuming half of households have no debt, does this mean is it 4X average household debt for those with debt?
One can symphasize with politicians and officials who have a natural tendency to gild the lily, although when things are serious realistic honesty is preferable - think Churchill in 1941. One anti-dote to over-optimism is to try to enumerate the zone of uncertainty. Here is Henry's attempt.
What could go right?
* Geopolitical risks remain contained.
* US recovery strengthens, although this would bring global interest rates higher than now expected.
*China's economy continues to growth at recent pace, or a bit quicker.
*No major economic problem in other 'locomotive' economies, eg Germany, UK.
*Business investment in Australia picks up faster than now expected.
*Household spending in Australia continues to grow at modest rate or falls, easing household debt problem that is a major risk factor for economic prosperity as global interest rates increase.
*Australia's overheated (bubble) housing markets stabilise or deflate slowly.
What could go wrong?
In general, opposite to above economic developments. For example:
* US economic recovery fizzles out or, on the other hand, President Trump's tax reforms and increasing spending maintains and strengthens current recovery and this leads to global inflation and faster increases in global interest rates.
* China's heavy weight of internal debt, especially loans to inefficient State Owned Enterprises, create slowing Chinese growth and falling global commodity prices.
Other major international risks are geopolitical.
* France seeks to renegotiate EU membership, or at least to leave the Eurozone.
* North Korea does something crazy, creating war on the Korean Peninsular involving USA and its allies.
* Muslin terrorists increase success rate inflicting greater costs on major western nations while continuing to create mayhem in existing hell holes.
In Australia, falling commodity prices increases gloom shared by many experienced non-political, non-official commentators. Other things that could go wrong include:
* Loss of one or two coalition members in the lower house throws politics into chaos. Current economic policy becomes even more dysfunctional. Australia's national debt grows faster, brings 'headwinds' sooner and more certainly.
* Overheated housing markets in Australia crash rather than stabilise or decline slowly, creating pressure on banks and especially their overgeared clients. As others have noted, this could be severe enough to end the 25 years of uninterupted growth and create the recession we will eventually recognise as another we needed to have.
“For clarity sake, ‘Ghost’ is the term used for the stored memories, real and manufactured, that are placed in cyborg machinery to make them more human. ‘Shell’ is the body (in which) the machinery is housed. (John R. Dilworth.) Fiona Prior enjoys the latest version Ghost in a Shell. More here
The Sporting life
Any season when the returning Blues beat Essendon and Collingwood is a success, and we have the Swans on the results sheet as well. Today was especially sweet, and was all the sweeter for the number of puzzling umpiring decisions that went against us. (The Blues trying too hard?)
St Kilda slaughtered Hawthorn last week and today were Giant Killers. And in another interesting result Adelaide were flogged by the Kangaroos. Seems like a year of upsets, indicating a changing of the guard.
John Coates will serve another term, making an eventual career of 30 years at the top. Board members of listed companies struggle to exceed 10 years, and if they keep being reelected are no londer regarded as independent after a decade or so. Like the American President, two 4 year terms should be good enough for head of the AOC, but no changing of the guard just yet it seems.
Good to see the Kangaroos win against the NZ Rugby team. Not for the first time one wonders how that Kangaroos would cope with the All Blacks in two games, each played under a different set of rules. (Say League in NZ and Rugby in Oz.)
Image of the week - one from the archives.