Australian Economic Briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues with a focus on Australia.Australian exceptionalism and the 2011 Census.

Australia is a handful of days away from a magic milestone:  this coming Sunday will mark the 21st birthday of Australia’s current economic expansion.  That is a remarkable achievement.  By the way, so are this nation’s low unemployment, inflation and interest rates.  Yet, as the Reserve Bank Governor recently pointed out, Australia’s glass is more than half full – even if many people don’t see it that way

Chances are you’re aware this is the longest ever spell of growth without a recession that Australia has ever achieved.  Yet it is equally likely you’re not aware that (subject to the caveat that not all the data is available) 21 years is a record for any nation.

‘Australian exceptionalism’ is more than just a phrase.  It is evident in some very basic statistics.  To take one old idea as an example, the 1970s saw the popularisation of a measure that was dubbed ‘the misery index’ – the number you get when you add the unemployment and inflation rates.  You may be interested to know that this measure is at its lowest in Australia since the 1960s.

·And last week’s release of Census data also shines a light on Australia’s achievements.  The latest Census was held in 2011, whereas the previous one was in 2006, so that period includes the global financial crisis. 

·Srikingly, evidence of Australia’s growth and prosperity is seen throughout the new Census numbers.  For example, population growth is fastest in the likes of Western Australia and Queensland, with WA accounting for all but one of the top ten fastest growing towns in Australia in the last five years.

·Yet although Australia’s population growth has been good – it averaged 1.5% per annum over five years, up from 1.3% over the preceding five years – it turns out that the Bureau of Statistics has been overestimating the size of the nation.  The new estimate residential population of 22.3 million people in the June quarter of 2011 reflects a downward revision of almost 300,000 people, or 7%.

·Tat’s almost the equivalent of misplacing a city the size of Canberra.  Couldn’t do that, could we?  (As an aside, maybe the 2010 election shouldn’t have been as focussed on Big Australia – turns out we weren’t as big as we thought.)

·Not overseas migration contributed 61% of population growth since the 2006 Census, or almost 1.2 million people.  Natural increase contributed just shy of 750,000 persons.

·Migration also drove most of the fluctuations in growth, with Australia cutting skilled migration intake targets in the wake of the GFC.

·Patterns of immigration have changed.  India tops the list of recent arrivals by nation, followed closely by the UK, China and New Zealand.  South Africa rounds out the top ten list with five other Asian nations.

·Compared to migrants who arrived in years past, three of the top five nations of birth are still the same today:  England, New Zealand and China.  However, the recent surge in arrivals from India propelled that nation to fourth spot overall, ahead of Italy, and dropping Vietnam off the list.

·The focus on skilled migration over the past five years has resulted in a much younger profile of arrivals, compared with the Australian born population.



Macro movements

·The Minutes of the RBA Board were released last week, relating to the meeting on 5 June when the bank cut rates by 25 basis points.  They noted the “impact of the fiscal consolidation on the economy was likely to be considerably less than the headline figures implied”, and limited the scope of further rate cuts.

·ince then, the National Accounts surprised markets with their strength, and the Labour Force release for May was also encouraging, with rising employment and labour force participation.

·           The G20 summit resulted in a promise from Euro area members of “all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”  The G20 more broadly promised to support global growth though has failed to outline any specific steps.

The week ahead

·           ABS Job vacancies and the Financial Accounts head a quiet week of official data releases

UK and International economic briefing by Ian Stewart

The Return of Country Risk

·           The global financial crisis has led to a massive reassessment of risk. Assets which boomed in the good years – from house, to bank share to the debt of southern European governments – have suffered badly.

·           Investors are desperate to avoid risk – so much so they tolerate burgeoning government deficits and negative real returns to buy UK and US government debt.

·           Nowhere has this reassessment of risk been greater than in the euro area. In 2005, the Greek and Spanish governments could borrow money through the bond market for roughly the same interest rate as Germany – around 3.1%. Financial markets treat the different governments of the euro area as if they were the same.

·           Today it costs the Spanish government four times as much to borrow as Germany. The Greek government pays eighteen times more than Germany. The debt crisis has led to a dramatic resetting of interest rates across Europe.

·           This is part of a wider story. The financial crisis has highlighted the profound – and in some cases growing – differences between the countries of the EU.

·           In doing so it has challenged a 50 year process of European convergence and integration, a process which had accelerated from the 1990s.

·           1990 saw German reunification followed, in 1992, by the creation of the EU’s single market in goods, services and capital. Five years later border controls between most member states were abolished. In 1999, the Single Currency came into being and in 2004 the borders of the EU moved eastwards to incorporate the nations of Central and Eastern Europe.

·           The way financial markets, economists and corporates looked at Europe changed too, with a growing focus on the region as a whole. The cross border operations of multinationals in Europe became increasingly integrated.

·           The financial crisis has halted this process and laid bare the differences in indebtedness, financial stability and competitiveness between the countries of Europe.

·           As a share of GDP, public debt in Italy, Ireland and Greece is two to three times higher than in Germany or the Netherlands. The EU has had to provide money to shore up the government finances – and the banks – in Spain, Ireland, Portugal and Greece.

·           It is indicative of the divergence of fortunes that an investment of €100 in German equities in late 2009 would have grown to €114 today. The same investment in Greek shares would be worth €26.

·           Such financial phenomenon reflects differences in the structures of Europe’s economies. A study of competitiveness by the World Economic Forum ranks the world’s economies on the basis of a raft of data – covering everything from education to innovation and the quality of infrastructure.

·           The study finds that the euro area encompasses some of the industrialised world’s most – and least – competitive economies.

·           The league table covers 146 economies with three euro area countries, Finland (4) Germany (6) and the Netherlands (7) in the top ten. Italy and Spain rank lower, at 36 and 43 respectively. Greece is in 90th place, below many emerging economies including Russia, Albania and Rwanda.

·           Trends in labour costs tell the similar story. Since 2000, German labour costs have risen by 4%. Labour costs in Ireland and Italy have risen by almost 40%; in Portugal and Spain by just under 50% and in Greece by 90%.

·           The single currency brought ultra-low German interest rates to countries used-to much higher rates, triggering a boom in house prices.

·           In the 10 years to 2007, Irish house prices almost quadrupled; Spanish house prices almost tripled. Over the same period German house prices were roughly unchanged. The subsequent collapse in Irish and Spanish house prices has wreaked havoc on highly leveraged banks.

·           Not only are economies diverging in Europe, voters increasingly doubt the benefit of European integration. A recent Pew Research Centre opinion poll across eight EU countries found majorities or near majorities in most believe economic integration has weakened their economies – including 70% of those polled in Greece, 61% in Italy and 50% in Spain. Only in Germany (59%) did a majority say their country had been well served by European integration.

·           Intriguingly, there was greater consensus on two other questions. When asked which was the least corrupt EU nation the top choice for voters across all eight countries was Germany. When asked which was the hardest working nation the top choice for seven nations was Germany. Those polled in Greece choose Greece. 

·           The process of economic and financial divergence in Europe could have a lot further to run. Country risk is probably here to stay.

Markets & News

UK’s FTSE 100 ended the week up 0.6%.

Here are some recent news stories that caught our eye as reflecting key economic themes:

Key themes

·           Eurozone leaders agreed to adopt a new eurozone growth package for the eurozone worth €130bn, or 1% of EU GDP – eurozone

·           Antonis Samaras was sworn in as the head of a new Conservative-led coalition government in Greece – Greece

·           The US Federal Reserve extended its “Operation Twist” bond buying programme which is designed to keep interest rates low, until at least late 2014 –quantitative easing

·           Credit ratings agency Moody’s downgraded the credit rating of 15 major international banks, citing their exposure to financial markets volatility– banking stress

·           The ratio of bad loans held by Spanish banks rose to an 18-year high of 8.7% in April – banking stress

·           An independent audit of Spanish banks found that they may require up to €62bn in extra funding, in addition to the €100bn of funding already agreed by European authorities – banking stress

·           The European Central Bank agreed to accept a wider range of collateral and assets of a lower quality in its lending operations – liquidity provision

·           German business confidence decreased in June by its largest margin since October 1998, according to survey data – slowdown

·           Christine Lagard, the Head of the International Monetary Fund, called for a “determined and forceful move towards complete monetary union” in the eurozone – euro zone politics

·           ECB executive board member Benoit Coeure claimed eurozone countries “have to make steps towards a fiscal union” – eurozone politics

·           Chinese manufacturing activity contracted at the fastest rate in seven months in June, driven by falling exports and weak domestic demand – slowdown

·           Earning for Queen Elizabeth’s Crown Estate rose 4% in the year to 31st March, with revenues from offshore leases for wind farms doubling – green technology

·           Japan posted a monthly trade deficit with the EU in May, the first since record began in 1979, driven by weak European demand – Japan

·           The number of Americans making new claims for weekly unemployment benefit rose to its highest level since December on a monthly average basis – unemployment

·           UK consumer price inflation fell to 2.8% in May, driven by falling food price and fuel inflation – inflation

·           The price of a barrel of Brent Crude oil fell below $90 for the first time in 18-months, over continued worries over global growth – oil

·           Gianfranco Polillo, a junior Italian economy minister, proposed that every Italian should do another week’s work a year, in order to increase Italian GDP by 1% – euro zone politics

·           Data shows US banks have reduced their holdings of corporate bonds to their lowest level since 2002 – flight to safety

·           PEBBLE, a watch that can display iPhone messages, raised $10.3m in May from 68,929 people on the crowdfunding website Kickstarter – financial innovation

·           Switzerland’s Cern particle physics laboratory is to allocate over $500m to hedge funds in a bid to boost returns for its $4bn pension scheme – search for returns

·           Data from the World Wealth Report shows that, for the first time, Asia now has more millionaires than North America – emerging markets

·           Survey data from Pew Research Centre found that, for the first time, people around the world are more likely to view China as the world’s number one economy –emerging markets

·           US pharmacy chain Walgreens, agreed to acquire a 45% stake in retail and wholesale pharmaceuticals group Alliance Boots, for $6.7bn – M&A

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