Saturday, August 25, 2012

Reasons (Not) to be Cheerful?

While I've been keen in recent months to accentuate the positives about the current performance of the Australian economy, I've been hedging my bets on the future of the Australian economy.

It shouldn't be in dispute that we've done well over the last 21 years and particularly since the global financial crisis.

One of the major factors in our success has been the continuing growth of the Chinese economy since the GFC, spurred by massive policy stimulus.

There are lots of people who have been warning of an end to the high growth rates in the Chinese economy for quite a few years now and I have written extensively about them over the same period. (here and here and here for example).

Increasingly, the view is that the Chinese authorities have been systematically understating the extent of the slowdown.

A recent report by the New York Times argued
The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.

As I've been arguing for quite some time, falls in iron ore exports will hit Australia particularly hard.

Although I would never offer anyone investment advice, I've shifted my super completely out of equities because I think things are about to turn down over the next 6-12 months, perhaps sooner.

Tuesday, August 21, 2012

China Threat Debate

This post is a note for my students in 7007GIR Australian Foreign Policy

The China threat debate continues on and on and on and provides an interesting way to consider debates in international relations theories.

One way to illustrate some of the positions to students are the very short statements by various scholars and others in a debate held in 2007 on the question: Beware the Dragon: A Booming China Spells Trouble for China.

John Mearsheimer provides a very neat summary of some of the key tenets of realism as they relate to China.

This is very well rebutted by a non-academic business man James McGregor.

Even though the debate took place in 2007, it still is extremely relevant to the current debate in Australia  and, of course, the United States.

Sunday, August 19, 2012

More Political Cartoons

I am indebted to Political Cartoons Australia for compiling a list of Oz cartoons ... something I've wanted for years ... great for lectures and for just viewing periodically ... sensational!!

I'm not sure about the copyright implications but I'm not making anything from this blog and I don't think PCA is either so, you know what, IDGAF.

Other cartoons are from a US site called GoComics, which I pay a small subscription fee ... about 15 bucks a year. Well worth the cost even for just a regular dose of Calvin and Hobbes and Doonesbury. My new favourite is Bliss.

Here's some recent ones ...

Saturday, August 18, 2012

Global House Prices: Australia Compared

One of my favourites among the excellent Daily Charts at The Economist is the Global House Prices Interactive Graph.

You can fiddle with it to get the date and country comparisons you like going back as far as 1975 for many developed economies and a few others, although not all data goes back to 1975.

Here are a couple of screen shots of comparisons I did ...

Apart from the unfortunate graphical detail that they are all shades of blue green (yes I am crap at colour differentiation), what is interesting about this long-term look is just how amazing has been both Spain and Ireland's rise and fall.

Over the longer-term, it makes the United States' recent fall relatively benign looking.

Germany's house prices are a paragon of stability and Australia's price rise also looks relatively benign over the longer term. Comparing just Australia, Ireland and the US makes the picture a little clearer (but why are they all blue-ish?). Ireland is the hill (mountain?), Australia the gradual rise and the US is at the bottom.

Even more impressive(?) has been the increase in South African house prices since 1975. It also puts Japan's collapse in prices in some perspective. (It'd be interesting to see a commercial property index comparison ... no really it would)

If we shift the starting point, we get a slightly different picture. Here's some selected countries starting in Q1 1985,1995, 2005 and 2008.

If we start from 1995 we can clearly see the continuation of the decline in Japanese house prices. Ireland, Spain and the United States are still above their 1995 base.

This is not the case if we start from 2005. The interactive also provides a lesson in how we can manipulate statistics by choosing our starting points. From a 2005 starting point, Australian prices look positively fabulous in comparison with the basket-cases!

From 2008 the picture is better for the US but still very bad for Spain and Ireland. Given what a disaster US housing has been, it makes you realise the extent of the crisis in Ireland and Spain. It also highlights just how well Australian house prices have held up.

If we go from 2009, we see the US prices have again fallen, but Australia continues to stay above water.

But from 2011 all of our team have fallen. Boo hoo.

Here's a few others that might be of interest.

China and Germany from 2001 (the first year data from China is available).

The Germans seem to have their property market just right, gradual growth, just like we want for inflation.

Here's from 2008 for another few.

For a more in depth analysis of the data see the work of Leith van Onselen from MacroBusiness.

Personally, I'm still hoping for further price declines in the inner suburbs of Brisbane over the next few years.

Friday, August 17, 2012

A Few Facts About Australian Immigration


Australia is a country made up primarily of migrants and those descended from migrants. Since World War II over 7 million migrants have come to Australia and over a quarter of the population was born overseas. Like foreign investment, which has been equally essential for Australian prosperity, immigration is a contentious issue that polarises the Australian community.

It is also is an issue that produces strange bed fellows such as the belief by some on the right and the (environmental) left that Australian population growth needs to be limited or even reversed, which obviously means either restricting immigration or the birth rate. The differences between these two extremes lies in the desire or not for discriminatory immigration. Australians, it seems, don't want the "big Australia" that then Prime Minister Kevin Rudd spruked in 2009. His successor, Julia Gillard, abandoned such rhetoric and has put the population question to one side as she battles the opposition on the conundrum of asylum seekers.

To understand immigration we need to distinguish between flows - the yearly movement of people in and out of Australia and stocks - the cumulative results of these flows over time. We also need to distinguish between types of immigration divided between the Migration Program and the Humanitarian Program.

Australia's Overseas Born Population

The ABS has just released its migration statistics, which put recent 'flow' figures into a 'stock' perspective.

While India is now the leading source of new migrants (not including New Zealand - a fact that none of the news stories I read on the statistics noted) the statistics show that the UK remains the largest source of overseas born Australians.

According to the ABS: "At 30 June 2011, 27% of the estimated resident population was born overseas (6.0 million people). This was an increase from ten years earlier at 23.1% (4.5 million people)."

The percentage of Australians born overseas has increased significantly since WWII, after declining precipitously after the 1890s.

People born in the United Kingdom accounted for 5.3% of Australia's total population at 30 June 2011. This was followed by New Zealand (2.5%), China (1.8%), India (1.5%) and Vietnam and Italy (0.9% each).

The percentage born in the UK are in decline, however, falling from 5.8% in 2001 to 5.3% in 2011. New Zealanders, however, increased their share from 2% to 2.5%, China from 0.8% to 1.8% and India from 0.5% to 1.5%.
In terms of Australia's population growth, for the top 50 countries of birth at 30 June 2011, persons born in Nepal had the highest rate of increase between 2001 and 2011 with an average annual growth rate of 27%. However, this growth began from a small base of 2,800 persons at 30 June 2001. The second fastest increase over this period was in the number of persons born in Sudan (17.6% per year on average), followed by those born in India (12.7%), Bangladesh (11.9%) and Pakistan (10.2%).
Of the top 50 countries of birth, the number of persons born in Hungary decreased the most, with an average annual decrease of 1.4%, closely followed by both Italy and Poland, with an average annual decrease of 1.3% each. The next largest decreases were of persons born in Malta and Cyprus (0.8% each).
According to the 2011 Census: "over a quarter (26%) of Australia's population was born overseas and a further one fifth (20%) had at least one overseas-born parent ... the proportion of the overseas-born population originating from Europe has been in decline in recent years, from 52% in 2001 to 40% in 2011."

If we consider the makeup of the overseas born, then the UK accounts for over 20.8 per cent, followed by New Zealand with 9.1 per cent, China with 6.0 per cent and India with 5.6 per cent.


Ancestry is another important component in considering Australia's ethnic makeup, but is not necessarily related to place of birth rather it provides an indication of cultural affinity.

According to the ABS report on Cultural Diversity:
It gives insight into the cultural background of both the Australian-born and overseas-born populations when ancestry differs from country of birth. The 2011 Census asked respondents to provide a maximum of two ancestries with which they most closely identify. As an example, they were asked to consider the origins of their parents and grandparents.
Over 300 ancestries were separately identified in the 2011 Census. The most commonly reported were English (36%) and Australian (35%). A further six of the leading ten ancestries reflected the European heritage in Australia with the two remaining ancestries being Chinese (4%) and Indian (2%).
Just under a third (32%) of people who responded to the ancestry question reported two ancestries. Second generation Australians were the generation most likely to report a second ancestry (46%). This may be due to having a strong connection to Australia and also to a parent's country of birth. Third-plus generation Australians were less likely (36%) to report a second ancestry. As both the respondent and their parents were Australian-born, they may be less likely to have a connection to more than one country. The group least likely to report a second ancestry were first generation Australians (14%).
The vast majority of people who reported an Australian ancestry were born in Australia (98%). For most other ancestries, the majority of people were born either in Australia or the country associated with their ancestry. The European ancestries in the top 10 ancestry groups follow this pattern. For example, 83% of people who reported German ancestry were born in Australia and 10% were born in Germany. Only 7% were born in other countries. This pattern differed for the Asian countries in the top 10 ancestry groups. For example, for those who reported Chinese ancestry, 36% were born in China, 26% in Australia and 38% born in other countries. Of those who reported Indian ancestry, 61% were born in India, 20% in Australia and 19% born in other countries.
Data on the 'flow' of migration in recent years is covered by The Department of Immigration and Citizenship's Migration Program Statistics.

Family related migration has accounted for between 31 and 35 per cent and skilled-related between 64 and 69 per cent.

According to the 2011-12 Migration Program Report India was the largest source of migrants, followed by China and the UK.

It is important to note that New Zealanders are not included in these figures.

Elsewhere DIAC states that New Zealanders have "been the major source country for settlers" since 2009 accounting for about 20 per cent in 2010-11.

The figures for 2010-11 were:
  • New Zealand (20.2 percent)
  • China (11.5 percent)
  • United Kingdom (8.6 percent)
  • India (8.3 percent)
The sub-continent region is now the largest source of migrants to Australia, replacing North Asia.

A Longer-Term Perspective

To put these recent statistics into historical perspective, according to DIAC:
Since October 1945, more than 7.2 million people have migrated to Australia—750,000 of these people arrived under the Humanitarian Program. ...
About one million migrants arrived in each of the six decades following 1950:
•1.6 million between October 1945 and June 1960
•about 1.3 million in the 1960s
•about 960 000 in the 1970s
•about 1.1 million in the 1980s
•over 900 000 in the 1990s
•over 1.2 million between 2000 and 2010.
The highest number of settlers to arrive in any one year since World War II was 185 099 in 1969–70. The lowest number in any one year was 52 752 in 1975–76.
Immigration as a percentage of Australia's population has been increasing since the late 1990s, after declining rapidly from the late 1960s.


The Humanitarian Program and Asylum-Seekers

In recent times asylum-seeking potential migrants have been the most newsworthy section of the migration process. According to the United Nations Refugee Agency (UNHCR) in 2011 4.3 million people were displaced with a full 800,000 of these fleeing their countries and becoming refugees. The others were therefore internally displaced.

For the world, at the end of 2011 42.5 million people were either refugees (15.2 million), internally displaced (26.4 million), or seeking asylum (895,000). This was a slight decrease on 2010 figures.

The biggest 'producers' of refugees were Afghanistan with 2.7 million, Iraq with 1.4 million, Somalia with 1.1 million, Sudan with 500,000, and Democratic Republic of the Congo with 491,000.

The largest hosting countries were Pakistan with 1.7 million, Iran with 886,500, and the Syrian Arab Republic with 775,400).

Most (80 per cent) refugees were hosted in developing countries.

According to the UNHCR, the figures for Australia were stable with 23,434 refugees and 5,242 asylum-seekers hosted at the end of 2011.

According to DIAC, in 2010-11 the Humanitarian Program was "fully delivered" with 13,799 visas granted. This was comprised of
5998 Refugee category visas, including: 759 Woman at Risk visas (12.7 per cent of total refugee visas granted)
7801 Other Humanitarian visas, including: 2973 offshore Special Humanitarian Program (SHP) visas [and] 4828 onshore visas. 
According to DIAC, the Humanitarian Program is divided into two: the onshore protection/asylum component, which "fulfils Australia's international obligations by offering protection to people already in Australia who are found to be refugees according to the Refugees Convention" and an offshore resettlement component, which "expresses Australia's commitment to refugee protection by going beyond these obligations and offering resettlement to people overseas for whom this is the most appropriate option."

The current debate in Australia is increasingly framed in terms of the disadvantage faced by those offshore refugees compared to those able to get onshore via "irregular" (called 'unlawful' entry) or conventional entry (by visa).

There are two categories of visas for the offshore component of the humanitarian program. These are:

Refugee—for people who are subject to persecution in their home country, who are typically outside their home country, and are in need of resettlement. The majority of applicants who are considered under this category are identified and referred by UNHCR to Australia for resettlement. The Refugee category includes the Refugee, In-country Special Humanitarian, Emergency Rescue and Woman at Risk visa subclasses.

Special Humanitarian Program (SHP)—for people outside their home country who are subject to substantial discrimination amounting to gross violation of human rights in their home country, and immediate family of persons who have been granted protection in Australia. Applications for entry under the SHP must be supported by a proposer who is an Australian citizen, permanent resident or eligible New Zealand citizen, or an organisation that is based in Australia.
The majority of visas granted are derived from offshore. In 2010-11 65 per cent of visas granted were from offshore.

In 2010-11, the biggest source of offshore visa grants went to those from Iraq, with a focus on Africa, the Middle East (Including South West Asia) and Asia.

Aboriginal Australia

What is clear form these statistics is that we're overwhelmingly a nation of relatively recent migrants. But what about Australia's original inhabitants? Any assertion that Australia is a nation of migrants needs not to ignore those of aboriginal and Torres Strait Islander origin.
According to the 2011 Census: 
there were 548,370 people identified as being of Aboriginal and/or Torres Strait Islander origin and counted in the Census.
Of these people, 90% were of Aboriginal origin only, 6% were of Torres Strait Islander origin only and 4% identified as being of both Aboriginal and Torres Strait Islander origin. These proportions have changed very little in the last ten year period.
In the Northern Territory, just under 27% of the population identified and were counted as being of Aboriginal and/or Torres Strait Islander origin in the 2011 Census. In all other jurisdictions, 4% or less of the population were of Aboriginal and/or Torres Strait Islander origin. Victoria has the lowest proportion at 0.7% of the state total.


Today's asylum-seekers are often pilloried as economic migrants, but most of Australia's population are either recent economic migrants or descended from them. As has been the case throughout modern Australian history, many of those already in Australia worry that new arrivals will make Australia a less attractive place to live. While the rate of immigration should be debated by Australians, it's important that we start from a knowledge of the basic facts. We are a nation of economic migrants.

Tuesday, August 14, 2012

Yeah Naah: Reflections on the Current Condition of the Australian Economy

I love listening to football player interviews after a game. My favourite response is the phrase "yeah, naah". In other words, I understand what you're saying, but I'm not sure if you're right (or maybe I haven't understood the question or even know what my name is after that hit to the head in the final quarter).

While many might think it's a rather silly response I think it's a reasonable appraisal of many things in life, including that most interesting of topics: the Australian economy. Yeah we've been doing well, but naah I'm not sure it's going to last or that we've prepared properly for the inevitable downturn.

A recent speech by Reserve Bank Governor Glenn Stevens using the increasingly hackneyed phrase "the Lucky Country" attracted considerable attention in the Australian press. Reserve Bank governors like the rest of us, like to hedge their bets so while most comment focused on the Guv's optimism, some noted the warnings contained in the speech as well.

Better to cover all bases so that if a crisis comes the Guv can point to his notes of caution. If things continue to go well, then of course he can point to his overall regular message of optimism.

Before we consider Stevens yeah naah interpretation of the Australian economy, I want to begin with a few general observations.
  • Australia has been lucky, but also relatively good on the issue of economic management since the mid-1980s. Lots of mistakes have been made but the direction and pace of change has been effective to sustain reforms.
  • The Australian economy has not been in recession for 21 years - very few of my students have any concept of a sustained downturn in the economy. According to economist Chris Richardson this is a world record. Perhaps this is another reason why the government is doing poorly, "success fatigue".
  • Seriously, though, some Australians aren't doing as well as others and, in an attempt to rectify this, the Gillard government has made some progress in redistributing income in Australia.The Howard government was also a big redistributor of income, mainly to families.
  • Australia will be negatively affected if Chinese growth slows - both directly and indirectly through flow on effects to other Australian trading partners e.g. Japan will be hurt and so Australian exports to Japan will slow as well. And so on. This implies that both industrial and geographical diversification will serve Australia well over the longer-term.
  • Part of any diversification strategy for the Australian economy doesn't just include manufacturing and services but agriculture as well. Foreign ownership of farm land is about 6% (1% of agricultural businesses are foreign owned and 11.3% of agricultural land is wholly or partly foreign owned, although more than half of this land was majority Australian owned). Developing the agricultural sector in Australia will require foreign investment, some of it from China.  Why people worry so much about farming, but ignore the fact that mining is over 80 per cent foreign owned continues to surprise me. While you might be able to damage farmland through poor farming practices, foreign investors won't be shipping the land out, like they are with minerals, petroleum and gas. One thing is for sure, demand for agricultural goods is going to expand over coming years and Australia will need to manage these developments, especially through the next drought period.
  • The European crisis is not going to end any time soon and will probably end up with financial upheaval as Greece and/or Spain eventually abandon the Euro.
  • The United States is likely to recover sooner than Europe, but still has a way to go as necessary stimulus and tax restructuring is restricted by political machinations.
  • Recovery from financially-induced recessions takes a long time as de-leveraging works its way through the global economy and as the 'paradox of thrift' has purchase in many advanced economies.
But let's get back to Australia. First Stevens canvasses the potential problems.
Rapid growth in Chinese demand for resources ... has been of great benefit to date, but what if the Chinese economy suffers a serious downturn? Another potential concern is dwelling prices ... A further theme is the focus on the funding position of Australian financial institutions, insofar as they raise significant amounts of money offshore. Could this be a weakness, in the event that market sentiment turns? ...  It has long been a visceral fear among Australian officials and economists that global investors will suddenly take a dim view of us. 
He then tells us we should welcome the sceptics and that some of their concerns might even be valid.
We should always be wary of the conventional wisdom being too easily accepted. We should never, ever, assume that ‘it couldn’t happen here’.
This new found openness to debate has been reflected in the RBA's recent concerns about the high value of the dollar. Sheesh, maybe, just maybe, there's a possibility that the RBA sees some validity in the idea of Dutch disease. Generally speeches from senior RBA and Treasury figures, not to mention that bastion of purist economic liberalism, the Productivity Commission, take the attitude of "get over it" or "welcome to the permanent future of never-ending Asian growth and mining largess".

Regular Gillard government critic Warwick McKibbin recently called for the RBA to intervene to decrease the value of the dollar and was himself criticised as an economic apostate.

But I digress. The Guv then considers a range of very pertinent questions that I've long been concerned about.
How much of the recent relatively good performance was due to luck? To what extent did we improve our luck by sensible policies, across a range of economic and financial fronts?
Are there signs of any of the things going wrong that people typically worry about?
And if there are, or were to be, such signs, could we do anything about it?
Despite these cautions, Stevens begins his analysis with three very relevant markers of Australia's above average performance. First up is GDP. As I argued recently in "Not Just Lucky, Good": "things could be worse. We could not be having a mining boom and we could have really bad economic policy-makers like those in the UK and Europe who believe that austerity is the solution to economic stagnation". 

Great Britain might have won many more medals than us, but their economy is a basket case because the Conservatives have failed to read their history books and believe that cutting debt and public services is always the best solution to an economic crisis. I'm sure once the hoopla of the Olympics has died down, most Britons would rather have Australian economic conditions than British ones and would give up some of their medals for a better performing economy.

The good news is that it's not just in aggregate GDP growth that Australia has outperformed other developed economies but in GDP growth per capita and in unemployment rates.

Stevens' contention is that while there has been a bit of luck involved, there have also been some good policy decisions over the past 20 years or so, a view with which I would fully concur. But as any football player would note, the game ain't over til it's over. Unfortunately for this analogy, the economic game never ends.

The biggest immediate concern for Australia is a long-standing economic vulnerability - changes in international demand for our exports. These days that means mostly Asian and particularly Chinese demand.

Those of you that follow the global and domestic economic debate will be well aware that the big issue at the moment is the short to medium-term prospects of the Chinese economy. This debate matters a lot to Australians, because if China tanks, demand for our resources will also fall.

Particularly worrying is the decline in the price of iron ore. China accounts for 61.5 of global iron ore sales.

The latest Composition of Trade publication from DFAT lists Australia's main exports up to the end of 2011. Iron ore accounted for 20 per cent of all Australian exports. You don't have to be too smart to realise that a substantial price decline will have a big impact on Australian export income.

Generally over the last 5 years, resource exports have grown in importance at the expense of a more diversified export structure. Education 'exports' have fallen to fourth, now behind gold.

Stevens believes that China's slowing is a "a normal cyclical slowing, not a sudden slump of the kind that occurred in late 2008".

The latest RBA Chart Pack provides an indication of this slowdown.

Others are not so sure that the problem is just cyclical. Michael Pettis, for example, argues in a recent (August the 6th) newsletter:
over the next three months we will see a rebound in Chinese GDP growth as investment expands. The leadership transition, after all, is in October, and no one in power wants to see the ten-year period under the leadership of President Hu and Premier Wen end with an economic whimper, especially after the very distressing political scandals we have lived through this year. 
I don’t think, however, that any rebound or recovery will last more than one or two quarters, and even then it is going to be a very tedious and lop-sided recovery. ...
the only sure way to pump up the economy is for Beijing to encourage infrastructure spending at the local and municipal levels, a very inefficient kind of growth, and one which will probably spur even more real estate development. This pumps up unnecessary infrastructure investment, but little of the benefits end up with consumers or with the companies that serve them. Goosing infrastructure investment is, however, pretty much the only economic policy tool Beijing has ...
As I have outlined many times before on this blog, Pettis believes that there is severe pain ahead for China as it restructures its economy away from an investment-led economy to a more consumer-oriented economy. This transition is sometimes seen as a relatively straightforward transition, but it will create many losers amongst China's elite and will therefore no doubt be resisted by many of them.

Another reason for pessimism about China is the fact that the prospects for the export sector - a major source of Chinese growth - are also grim because of continuing global economic woes, with Europe particularly woeful.

Stevens is certainly amongst the optimists when it comes to China's prospects.
the Chinese authorities have been taking well-calibrated steps in the direction of easing macroeconomic policies, as their objectives for inflation look like being achieved and as the likelihood of slower global growth affecting China has increased. Prices for key commodities are lower than their peaks, but are actually still high.
So far, then, the ‘China story’ seems to be roughly on course. It is certainly true that we will feel the effects of the Chinese business cycle more in the future than we have been accustomed to in the past. That presents some challenges of economic analysis and management. But even so, it may be better to be exposed to a Chinese economy with a high average, even if variable, growth rate, than, say, to a Europe with a very low average growth rate that is apparently also still rather variable.
The last part of that analysis is definitely right. Let's say it again loud and clear: resources have not been a curse for Australia. They have made us richer, even if we could have done (and could do) a better job of distributing the benefits.

Another area where Stevens is a bit yeah, naah is on dwelling prices. Despite recent price falls, Australia has not had the bust that has occurred in many other developed countries.
Scaled to measures of income, Australian dwelling prices on a national basis have in fact declined and are now about where they were in 2002. That is, housing has become more ‘affordable’. Four or five years ago we supposedly had a housing affordability ‘crisis’. Now it seems that the problem some people fear is that of housing becoming even more affordable.
He then considers whether house prices are still over valued. Making comparisons with long-term averages or overseas prices are fraught with danger and basically involve guesses.
arguments that appeal to historical averages for such ratios lose potency the longer the ratio stays high. In Australia's case the ratio of prices to income on a national basis has been apparently at a higher mean level – about 4 to 4½ – for about a decade now.
If we compare Australia and the United States, Stevens contends that:
it is hard to avoid the impression that gravity will inevitably exert its influence on Australian dwelling prices. But if we put these two lines on a chart with a number of other countries with which we might want to make comparisons, the picture is much less clear.
Stevens argues that it is the United States that is the "outlier" and that we have more in common with the rest of the developed economies.

Another reason that Stevens is confident about housing (and also therefore about the banks) is that arrears rates remain low. Debt repayments as a percentage of income have declined. There is also a high proportion of mortgagees ahead on their payments. This factor together with the low unemployment rate is certainly on the yeah side of our equation.

Anecdotally, however, I know a lot of public servants in Queensland who are worried about their mortgages and job security given the Newman government's mindless and arbitrary slashing of public sector jobs. If repeated by an Abbott government it could contribute to the naah side of the equation just at the time as the economy is hit by a China slowdown! 

As an aside, upon coming to power, the Howard Government argued it was necessary to reduce the size of the Commonwealth bureaucracy, so it cut staff savagely from 143,226 in 1996 to 113,627 in 1999. But in the early 2000s, the size of the public service began to grow again, and by 2006 it had surpassed the level of 1996 to reach 146,384 personnel. This is despite the additional high levels of outsourcing of government work. Between 2005 and 2006 the public service increased by 13,000 or 9.6 per cent compared to 1.7 per cent for the national workforce. Howard was often accused of being an unrestrained neo-liberal, but he certainly didn’t believe in small government. 

The second long-term vulnerability that Australia faces alongside the potential for a decline in demand is an interruption to financial supply. This is important because Australia has a high level of foreign debt and the banks a high exposure to foreign lenders.

Stevens acknowledges that the banks engaged too heavily in borrowing short, lending long in the lead up to the GFC, but argues that they have been effectively moving away from this model. 

Stevens is also not worried at all about the current account deficit (CAD), a major worry of policy-makers in the 1980s and 1990s, but a non-issue for them since the 2000s.
while we have been told over the years how Australian banks were doing the country a favour by arranging the funding of the current account, they have stopped doing this over the past year without, apparently, any dramatic effects. As measured in the capital account statistics, there has been a net outflow of private debt funding over the past two years, offset roughly by increased inflow of foreign capital into government obligations. This has occurred with a net decline in government debt yields and a net rise in the exchange rate. The current account deficit has, in other words, been easily ‘funded’ without the assistance of banks borrowing abroad – in fact, while they have been net re-payers of funds borrowed earlier.

Not everyone agrees that the CAD cannot return as a key issue for the Australian economy, but it has definitely been removed from the forefront of the policy debate in recent years. Like many economic issues, concern will probably return as the deficit grows once again.

Stevens is also not particularly worried by our vulnerability to a decline in financial supply, although he doesn't dismiss it completely and nor should he. An Australian downturn together with another global credit crunch would be a very bad thing for a (private) debt exposed economy like Australia's.

Capital flows into Australia through foreign direct investment and more recently into Australian dollars generally have led to a higher dollar and a well funded current account deficit, but this too could change if new investment dries up and assessments about Australia's safe haven status become negative.

A financial collapse in Europe could lead to another global financial crisis, but Australia would have room to move on fiscal policy if the government (of whatever stripe) can overcome the negative politics of public debt increases.

The RBA, of course, still has room to move on interest rates, which would give households with mortgages more disposable income. If a credit crunch was mixed with a slowdown in China and rising unemployment then conditions would be tough in Australia, but still better than in most other developed economies.

It's also possible that a worsening of the European situation could actually lead to an increase of capital flows to Australia, which wouldn't be a problem for the banks, but would be for manufacturing, domestic tourism and other trade exposed sectors of the economy through Dutch disease effects.

Stevens appears to have significant faith in the Chinese Communist Party to manage the Chinese economy and with the leadership transition pressures to keep the economy humming will be high. Nevertheless, the high investment, low consumption growth model is unsustainable over the longer-term and we have to hope those communists get it right.

Overall, Stevens is right to be more yeah than naah about the Australian economy, but we shouldn't lose sight of economic vulnerabilities both short and long-term. We need a flexible economy that remains diversified.

We also need to remember that the redistribution of resources and opportunity across Australian society is necessary to maintain popular support for a dynamic open economy.