This article first appeared in the March edition of The Melbourne Review:
ANOTHER YEAR OF EXPANSION
The economy has started 2014 on a strong footing, although there remain quite divergent trends within the changing composition of that growth.
Mining investment is falling away very sharply and perhaps one of the easiest things to forecast for the next few years is for further sharp declines. Many of the huge mining projects of the last decade have been completed or are close to completion. The work is finished. Given the huge capacity in mining built up over that time, there are very few new mining projects on the horizon.
The week ends with the Abbott government borrowing a further $700 million today, which brings the total of gross borrowing since 9 September 2013 to $61.15 billion.
$61.15 billion of bond and T-Notes that have been issued in just over six months as the government funds the budget deficit, covers maturing bonds and T-Notes and prepares to fund a range of its policy expenditure items.
As I have noted at nausium on the issue of government debt over recent years, the Australian government's debt level remains trivial, chicken feed, small beer and the campaign of the Coalition Parties to suggest otherwise was factually flawed and it still is.
Rory Robertson, my old mate and former RBA 'lumpy items'* co-conspirator, and I have a wager about the RBA meeting in May.
I quite emphatically believe the RBA needs to hike interest rates soon from the current historically low 2.5 per cent. This is because there has been a flood of information showing a move in the Australian economy to above trend growth, rising inflation, the unpleasant consequences building from a reflation of house prices and an unambiguously stronger world economy.
As has been the case over the last 15 years or so as I have made and refined my interest rate forecasts, my view must be placed in context of the market pricing for interest rates. At the moment, the market is pricing in a small chance of an interest rate cut, yes cut, in May. It may only be a basis point or two, but it is a cut nonetheless. While no one surveyed in the recent Bloomberg survey on interest rates expects the RBA to cut in May, there are still four forecasters expecting a cut by the third quarter of 2014.
Despite more bank economists rolling over and flipping their forecasts for interest rate cuts into calls for interest rate hikes, financial markets are yet to price in those higher rates.
Indeed, for the next few months, the futures market is still pricing in the risk, albeit a low one, that he RBA could still cut interest rates.
A factual interpretation of market pricing is effectively for the RBA to be holding interest rates steady for at least the next year. If this turns out to be correct, it could be the longest period of interest rates on hold on record, noting that it is already 8 months since the last RBA interest rate adjustment.
I smell a big, dirty, dead rat in the IMF report on Australia that the ABC Fact Checking Unit used as its source to verify the basis of Treasurer Hockey's claim that "Of the 17 top surveyed IMF countries, Labor left us with the fastest growth in spending of anyone in the world... and they left us with the third highest growth in debt of anyone in the top 17."
The IMF report has some curious inclusions and omissions in that "top 17".
The Abbott government's cooking of the books in the Mid Year Economic and Fiscal Outlook continues to be exposed, this time by Finance Minister Matthias Cormann himself.
In the Government's Monthly Financial Statement, which details actual spending and revenue for the government up to and including January, taxation revenue is running a thumping 1.5 per cent ahead of the projections outlined in MYEFO. In just seven months, that is $2.8 billion extra tax revenue over and above the increasingly discredited numbers in MYEFO.
Here's a simple question.
The Treasurer Mr Hockey makes a claim that "Of the 17 top surveyed IMF countries, Labor left us with the fastest growth in spending of anyone in the world... and they left us with the third highest growth in debt of anyone in the top 17".
You are asked to check this for its factual basis, not an easy job, but it is important to see whether the Treasurer is telling porkies or if he is correct.
A fair enough strating point is to go to the Treasurer's office and ask, what is the source of this claim?
The usually excellent ABC Fact Checking Unit has made an elementary error in its assessment of Australia's debt and deficit position.
In particular it says that Treasurer Joe Hockey is "correct on Australia's debt, spending".
The link is here: https://www.abc.net.au/news/2014-03-13/joe-hockey-correct-on-australia-debt-and-spending/5310736
On 6 March, Mr Hockey said on ABC radio that "Of the 17 top surveyed IMF countries, Labor left us with the fastest growth in spending of anyone in the world... and they left us with the third highest growth in debt of anyone in the top 17".
Mr Hockey added, "the fact of the matter is they've left a whole lot of landmines in the budget. We need to carefully remove those landmines and put us back on a path that gets us away from $123 billion of deficit, and starts to pay down the logjam of $667 billion of debt."
Since a price was put on carbon on 1 July 2012, there have been a few interesting developments in the Australian economy and markets.
Here are a few:
Employment has increased by 193,100.
The ASX has risen by 32 per cent, which has seen the market capitalisation of the Australian stock market rise by just under $400 billion in 20 months. Around $90 billion in dividends have been paid out, over and above this, over that time.
It was always going to happen – the pace of economic growth was certainly strong enough to be generating jobs – it was just the lag between a stronger economy and more jobs that was in question.
So news of a nice jump of 47,300 in employment in February and a flat unemployment rate is certainly good news and it is starting to bring the labour force data into line with the rapid economic expansion now underway in the broader economy.
With house building at record highs, consumer spending returning to above trend growth and export growth running at a strong double digit pace, many more jobs will be created in the year ahead. Indeed, it would be reasonable to expect around 200,000 jobs to be created in the next 12 months, even if the monthly profile to get there is extremely volatile.