Back on May 9, I wrote about the failure of Australia’s young economists to recognise that Australia’s economy is at risk as the mining boom winds down. For that little effort I received the following amusing tweeted reply from one of the youngsters in question, Chris Joye:
christopher joye @cjoye 17h
Poor old “Houses & Holes” of Macrobusiness: his 2 big calls–Aussie house prices and the dollar are going to dive–biting him in bum
Now, I will note in passing that I have not made a “big call” on house prices falling, though I have noted that the risks of a fall are now higher than I can recall. My call this year has been that house prices will under perform expectations and will struggle to do better than inflation. That’s looking a pretty decent call at this stage.
Moreover, my much mocked dollar call seems rather to be biting Chris in the bum, so much so he has today become a bearish currency analyst:
First, the RBA apparently crossed a Rubicon with its May rate cut, as I warned them prior to the decision. With the cash rate being pre-emptively crunched from 4.25 per cent to 2.75 per cent today, the carry trade, or yield differential, afforded by Australian bonds is much less enticing. The newly introduced FX risk amplifies this point.
Second, global investors are clearly more jittery about the prospects for Australia’s economy as we move past the investment phase of the mining investment boom and questions arise regarding our key trading partners’ growth rates.
Setting aside the spin we see from ALP lobbyists and uninformed commentators, the stunning increase in Australian government debt from $150 billion at the end of 2007 to over $500 billion today, combined with six years of consecutive budget deficits, has also withered the notion of the “Wonder Down Under”.
Third, the inevitable unwinding of the biggest public intervention in private financial markets in history is looming. I have cautioned before that this puts into play the risk of much higher US yields and a dramatic decline in Australia’s exchange rate with unsavoury inflationary consequences. This time appears nigh.
Welcome to the club, Chris! But I advise dropping the incipient rage about an inflationary surge. The consequences may be unsavoury but they will be better than not seeing the dollar fall. And don’t fret too much about the tradable inflation, the RBA will look through it.
Meanwhile, another of the young turks, Paul Bloxham, yesterday argued in a short video interview on CNBC that there is no mining capital expenditure cliff (rather a plateau over the next few quarters), and that the non-mining economy will fill the void left as the mining investment boom eventually unwinds, and that he doesn’t believe that the RBA will make further cuts to interest rates this year given the Aussie dollar’s recent (modest) depreciation.
Wrong again. The RBA will cut again, even as the dollar falls. It will have no choice as the mining investment cliff gets steeper. I reckon June is odds-on at this stage but we’ll certainly see more before year end. And again, the RBA will look through tradable inflation when it comes.
Two days ago it was “Mad” Adam Carr jumping at bears under the beds:
“Things are continuing to improve, not that you would know about that here. In Australia we’re all getting ready for another recession. The determination of some people is incredible. Alarmists run around frantically telling anyone who will listen that we are doomed unless the dollar comes down sharply, and we are headed for a deep recession.
This is nonsense, although I don’t discount the possibility of the country talking itself into recession – something Reserve Bank Governor Glenn Stevens has noted in the past. The biggest risk here is that we talk ourselves into recession and for some reason there is no shortage of people who are prepared to do the work here, to put in the hard yards. Far too many business commentators and economists are more than willing to, and have been for many years. When the data shows the absurdity of their arguments they just swap hats, as if they weren’t being alarmist in the first place. Then they switch back to alarmism as soon as they get the chance.”
And capping us off this morning we have the Kouk, who I have not included in the band of young brothers to date, but with his conduct on Twitter this morning tosses himself into the gang:
This is a reply to a 37 page document derived from decades of research and experience by Australia’s most internationally regarded economist. Enough said.
Come on fellas! How are we to address difficult economic circumstances if you don’t take responsibility for your learnings, if you wed yourselves completely to official forecasts and if we’re not allowed to mention the word recession for fear of upsetting the delicate little punters? There is more to the economy than confidence. Much, much more.
You’re letting your readers down. You’re letting your businesses down. You’re letting the nation down.
