What crisis? This crisis
Australia's trading conditions are a genuine national crisis. As the mining boom ends, there's nothing to take its place – and our Dutch disease won't necessarily end when the boom does.
Yesterday’s monthly business survey from NAB should be setting off alarms in Canberra and through every bank and big company boardroom in the country: Australia’s non-mining businesses are in serious trouble just as the resources boom ends. There will be nothing to take its place.
Businesses are reporting that all aspects of trading conditions in virtually all industries are weaker than they have been since early 2009, when they were recovering from the global credit crisis. Wholesale, retail, manufacturing, construction and even mining are all reporting that things are tougher than they have been since the GFC.
Economists were shocked yesterday when they saw survey and the dollar immediately began to fall as they adjusted their thinking on the next rate cut: 150 basis points of rate cuts have done nothing to improve business sentiment and actual conditions have gone from bad to worse. Labour costs have collapsed but even that hasn’t improved things. A record 72 per cent of businesses say they don’t need finance now.
This is a genuine national crisis, but the problem is that it’s going largely undetected and unaddressed because it is not showing in the broad economic data, which is what the Reserve Bank sets interest rates by. That’s why rates were left on hold this month, and may be again in December.
But a big gap has opened up between what businesses are saying about what’s happening and what the ABS is reporting.
Anecdotally, businesses are closing at an alarming rate, with SME owners giving up and looking for a regular job instead.
It appears to be the so-called Dutch disease, when a commodity-based terms of trade boom pushes the currency high, which destroys the competitiveness of non-resources industries.
The structural shift taking place – shown by the big gap between the trading conditions and sentiment of the best and worst performing industries – is wider than it’s ever been. Reporting that, NAB’s economists said yesterday: "The persistent divergence in industry conditions indicates that the Australian economy is undergoing a structural transformation towards mining and service-based industries, and away from traditional manufacturing and discretionary retailing.”
For Australia the problem is given added urgency by the fact that the mining investment boom is going to peak next year and begin to decline and the commodity price boom has probably already peaked.
The great challenge facing the Australian economy in this decade is going to be what replaces the mining boom when it ends.
And although, theoretically, that will lead to a fall in the exchange rate and therefore an improvement in the state of export and import-competing industries, it is not just resources investment that is keeping the dollar high.
There has also been a collapse in the supply of AAA-rated sovereign debt in the world, from $US26 trillion at the beginning of 2011 to less than $US12 trillion today. That’s because of the number of countries, including the United States, that have lost their AAA rating.
Many investment funds are required to invest only in safe AAA-rated securities, others just want to. As a result funds have been flooding into relatively high-yielding Australian governments securities, as well as AA-rated bank shares and bonds. This is the other reason the dollar is persistently high. More than three-quarters of Australia’s government debt is now owned by foreigners, especially foreign central banks.
This global shortage of AAA-rated securities is not going to end in a hurry and will ensure that Australia’s Dutch disease problem will not necessarily end with the end of the mining boom.
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