A difficult year for Australia’s two-speed economy (2012)

Australia’s two-speed economy looks set for a difficult year in 2012.

In December last year, a large unexpected drop in employment occurred nationally. Three of Australia’s largest employment sectors: finance, manufacturing and retail, are already experiencing major downturns and began laying off workers in 2011. This is pattern is unlikely to change, but may yet get worse.

The strong Australian dollar will continue to dampen exports and imported products will become increasingly attractive. This will hurt the local manufacturing sector. All indications suggest Australian retail consumers are unlikely to return to the excessive credit-driven spending of past, and will instead continue to use spare disposable income to pay down existing debts.

More bad news for the already suffering retail sector. Finance sector employment is also set to fall significantly this year, reflecting both the decreasing rate of credit-growth and an increasing level of online banking, which employs fewer staff.

Both sides of federal politics in Australia also seem hell bent on an immediate return to surplus, despite lower than expected revenue; which could lead to public-sector job losses in the short term.  With all of this combined, it’s really not looking good for the average Australian worker or small business owner in 2012.

Unemployment to increase?

Alan Kohler, in his article published on January 20 by Crikey, suggests we could see unemployment heading toward 6% this year, citing 5 primary reasons:

  1. Bank funding costs are rising, which means they will cut staff and not pass on the full extent of any official rate cuts — muffling the effect of monetary policy;
  2. Consumers are saving more and when they do buy stuff it’s increasingly online, so shopkeepers need less staff;
  3. The Australian dollar will remain above parity because Australia’s government bonds are among the highest yielding AAA securities in the world;
  4. Cafes and restaurants are being forced by Labor Party legislation to pay uneconomic weekend penalty rates;
  5. The federal government is unnecessarily returning the budget to surplus next year, which will require retrenching public servants

The wording of point 4 is a blatant political jab, but it does raise the issue of struggling small businesses. Weekend pay-rates may, at worst, constitute a ‘straw which broke the camels back’ scenario. What is really causing local businesses to struggle is increasing debt-repayments, rental prices and insurance costs, and none of these are likely to see any improvement this year.

The other four points are right on target and represent significant challenges for employment growth in the Australian economy this year, and into the future.

Chinese demand for Australian resources

A planned decrease in the rate of Chinese growth, recently announced by the Chinese government, could pose a risk for the Australian resources sector in 2012. The slow-down is deemed necessary to combat dangerously high levels of inflation, and will see Chinese growth reduced to 7% per annum, the lowest rate since the late 1980s. In contrast, the last decade has seen Chinese GDP growth hover between 9-13% per annum.

The slowdown itself will not have a significant effect on the level of Australian exports to China in the immediate-term, as these are mostly pre-determined. However, with lower expectations for future demand, comes lower commodity prices on international markets, and these could lead to lower profits for the Australian resources sector. In fact, the ongoing European debt-crisis has already begun having a negative impact on commodity prices in recent months.

What about the housing market ?

The Australian housing market is unlikely to experience a recovery this year and may in fact face another sharp decline, despite increasing activity in late 2011.Ongoing rate decreases from the Reserve Bank and depressed housing prices are likely to encourage first-home buyers and owner-occupiers back to the market this year, but this is unlikely to offset the huge decrease investment spending.

With the ratio of interest payments to disposable income now at 2.5x the levels they were during the peak of high interest rates in the late 1980’s, don’t be surprised if the downturn actually accelerates. Indeed, Steve Keen’s January 11 article in Crikey, provides a strong argument suggesting the Australian housing boom which has been ongoing since 1991, could now be over.

Keen uses Australian Bureau of Statistics graphs to illustrate how real levels of debt-stress for Australian home owners have become unsustainable. We simply can’t afford to pay any more than what we already are for our homes, if that. Statistics show that many investors have realised this, and have begun decreasing their levels of investment in the Australian property market. Exactly what this means is hard to predict.

US economist Jordan Wirsz recently suggested up to 60% could be wiped off the value of the Australian housing sector. Personally, I think this estimate is excessive. When and if such a major correction does occur, I would expect it to be in the range of a 25-35% decline, including values already lost in 2011. This should be sufficient to bringing mortgage repayments down to a level which is manageable for most households.

A tough year ahead

Taking all of this into consideration… My prediction for 2012 is a very tough year for average working class Australian’s, with rising unemployment, falling asset values and a possible credit crunch for small business owners keeping us all on our toes. But it could also be far worse, depending just how bad things get in the EU and USA this year.

Relevant links:
Steve Keen in Crikey, January 11: “Is Australia’s housing bubble finally close to bursting?”
Alan Kohler in Crikey, January 20: “Why unemployment is heading to 6 percent”.
Alan Kohler in The Drum, January 18: “The three downturns to watch”.
Sonya Korman in PerthNow, January 20, “Bloodbath to hit Australian real estate, global property analyst Jordan Wirsz says”

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