The Australian dollar took a move upwards on seemingly bad news. Investment in capital goods was down.
The reason why the dollar got stronger was that investment in the manufacturing sector was up. An unexpected event. This is seen as good as Australia tries to get over dependence on the mining boom.
Not that long ago it was fashionable to talk about a 'two speed economy'. The mining sector forged ahead, driving overall GDP growth, while manufacturing shrank. It was more accurate to describe a 'multi-speed' or 'patchwork' economy as different states and industries met very different fortunes.
So this is good news of sorts, but still points to an overall downward trend in Investment (a component of Aggregate Demand).
The story does help us understand important influences on the exchange rate. To understand why the exchange rate changes on this news is important:
1. The exchange rate is determined by the demand for and supply of the Australian dollar.
2. A major reason to demand Australian dollars is to buy iron ore (Australia's largest export) and the price of iron ore has fallen 28% in the last year. Therefore buyers need fewer dollars and so demand for dollars falls.
3. Another reason to buy dollars is to invest in Australian businesses. If an economy is growing strongly the chance making a profit is higher.
4. The new figures on investment in manufacturing imply that Australia will grow faster than was previously expected.
5. Therefore confidence in Australian future profits has risen, this will mean greater demand for investing in Australia in the future, and so the demand for dollars rises now.
6. Demand for Australian dollars rises now because some speculators will expect the dollar to be worth more in the future and they seek to buy dollars now to make a profit reselling them later.
It's easier on a diagram!
Thursday 29 May 2014
Tuesday 20 May 2014
Dive, dive, dive!
The Federal Budget has, as expected, had an affect on Consumer Confidence (sentiment). However the hit is far greater than was anticipated.
One measure has consumer confidence declining by 14% in the latest four week period.
The Westpac-Melbourne Institute measure of Consumer Confidence also fell. Westpac's Chief Economist, Bill Evans, commented, "The sharp fall in the Index is clearly indicating an unfavourable response to the recent Federal Budget. This puts the Index at its lowest level since August 2011, before the Reserve Bank began its recent rate cut cycle."
The diagram shows the Westpac-Melbourne Institute data, issued today.
This is important because as Consumers Expenditure is the largest component of Aggregate Demand this is likely to affect the real economy. When confidence falls households reduce spending (raise saving) and this knocks on to the real economy as the AD curve shifts to the left.
This is an early indication of confidence and it will probably rebound when people get over the shock of the Budget. However the overall effect will still be to depress AD for the rest of the year with the inevitable consequences for output and employment and, of course, business confidence.
One measure has consumer confidence declining by 14% in the latest four week period.
The Westpac-Melbourne Institute measure of Consumer Confidence also fell. Westpac's Chief Economist, Bill Evans, commented, "The sharp fall in the Index is clearly indicating an unfavourable response to the recent Federal Budget. This puts the Index at its lowest level since August 2011, before the Reserve Bank began its recent rate cut cycle."
This is important because as Consumers Expenditure is the largest component of Aggregate Demand this is likely to affect the real economy. When confidence falls households reduce spending (raise saving) and this knocks on to the real economy as the AD curve shifts to the left.
This is an early indication of confidence and it will probably rebound when people get over the shock of the Budget. However the overall effect will still be to depress AD for the rest of the year with the inevitable consequences for output and employment and, of course, business confidence.
Tuesday 13 May 2014
Not a shock, but a shocker.
Below are a couple of links which give easy to digest details on last nights Federal Budget.
I will deal with individual measures in individual posts. It is often best to hold fire on these things as the budget speech gives few details and nasty things are often hidden on page 350 of the document and take time to come out!
The things we need to think about are how the Budget impacts on the economic goals and the standard of living. Understanding the philosophy of the budget also helps a lot to get the idea.
Saturday 10 May 2014
Inequality - a key goal that always gets a low priority?
The VCE study design insists that equity is a goal of government policy. In Australia it has always been a matter of pride that income distribution is more equal than other developed countries, but since the 1980's policy measures have not really backed that up.
The coming Federal Budget is likely to make the distribution of income less equal, particularly if the petrol excise duty and GP visit co-payment is introduced. However the discussion of the Budget will be dominated by its affects on other goals I suspect, so dealing with it now might be opportune.
Inequality is measured by the Gini co-efficient. The table below showshow Australia compared in the 'late 2000's'. Although a Gini co-efficient of 0.33 isn't too bad at all compared to the 1980's it is about 20% more unequal (Australia would have been in around the same position as Hungary on this graph.
The coming Federal Budget is likely to make the distribution of income less equal, particularly if the petrol excise duty and GP visit co-payment is introduced. However the discussion of the Budget will be dominated by its affects on other goals I suspect, so dealing with it now might be opportune.
Inequality is measured by the Gini co-efficient. The table below showshow Australia compared in the 'late 2000's'. Although a Gini co-efficient of 0.33 isn't too bad at all compared to the 1980's it is about 20% more unequal (Australia would have been in around the same position as Hungary on this graph.
The article below from The Age explains the likely impact of a number of proposed Budget measures. We shall return to them when we look at the goal of equality later.
Thursday 8 May 2014
Unemployment steady, but what next?
In a surprise set of figures Australia's unemployment rate remained at 5.8%. Many expected a rise after last months surprise fall.
There were over 14,000 new jobs created and unemployment actually fell a little (by 400). However the participation rate fell again and this indicates that more people 'left' the workforce as they stopped looking for work.
The table below is from the ABS.
There were over 14,000 new jobs created and unemployment actually fell a little (by 400). However the participation rate fell again and this indicates that more people 'left' the workforce as they stopped looking for work.
The table below is from the ABS.
When looking at the figures concentrate on trends. These are over the last year, rising employment, steady/falling unemployment and a falling participation rate. These can be seen in the last column.
The question of where unemployment goes next is a big one. The two articles below, both from the Sydney Morning Herald, take opposite lines. One says unemployment may have peaked, the other that the next two years will see much higher unemployment.
ust
Look at the factors each article considers is driving employment. this is a classic 'headwinds' and 'tailwinds' situation. Some factors are pushing the economy one way and some the other. You must be aware of these different factors.
Monday 5 May 2014
Debt levy looks less and less likely
The Commission of Audit and the government have now scared the population half to death with the prospect of expenditure cuts and tax rises. That was probably their point. whatever the Federal Budget delivers next week will be a relief and might actually lead to a rise in government support which has been battered in the last few weeks.
I remain astounded that the government can still claim a budget crisis and base their policy on the need to fix it. There are three important points we need to consider:
1. The deficit forecast is based on low growth forecasts which depress tax revenues.
2. The government continues to lump capital spending in with current spending when reporting the deficit.
3. Governments are not households and don't have to follow the same rules on borrowing.
The first point means that the deficit crisis is political. Using assumptions which suit their economic case is an old political trick.
The second and third points are related. Most governments try to balance their current spending over the economic cycle. Borrow in the bad years and repay in the good. That's a pretty safe fiscal strategy.
However all governments have the responsibility to invest in infrastructure and capital projects that aid the economy to become more productive and provide the public and merit goods needed to maintain and improve the standard of living. Such projects such as railways, the NBN and hospitals are used for years. They should be paid for by loans that are repaid by the future users, not current tax payers.
When the capital items are taken out of the budget the deficit looks very manageable.
I will deal with the desirability of managing economic activity in a later post, but for now consider that the deficit is a tool to manage the level of activity.
All this talk of taxes and expenditure cuts is dangerous in itself. A key part of Aggregate Demand is Consumption and this relies not only on income levels but also consumer confidence. Scare the households enough and they will react instinctively to the uncertainty and save more. This will reduce consumption, a component of Aggregate Demand, and so lower the level of economic activity.
A similar argument can be made for business confidence and investment, also a component of Aggregate Demand.
Below is a link to a Guardian article where former Liberal Treasurer Peter Costello says a deficit tax won't work and the head of the Commission of Audit says it will do harm.
I remain astounded that the government can still claim a budget crisis and base their policy on the need to fix it. There are three important points we need to consider:
1. The deficit forecast is based on low growth forecasts which depress tax revenues.
2. The government continues to lump capital spending in with current spending when reporting the deficit.
3. Governments are not households and don't have to follow the same rules on borrowing.
The first point means that the deficit crisis is political. Using assumptions which suit their economic case is an old political trick.
The second and third points are related. Most governments try to balance their current spending over the economic cycle. Borrow in the bad years and repay in the good. That's a pretty safe fiscal strategy.
However all governments have the responsibility to invest in infrastructure and capital projects that aid the economy to become more productive and provide the public and merit goods needed to maintain and improve the standard of living. Such projects such as railways, the NBN and hospitals are used for years. They should be paid for by loans that are repaid by the future users, not current tax payers.
When the capital items are taken out of the budget the deficit looks very manageable.
I will deal with the desirability of managing economic activity in a later post, but for now consider that the deficit is a tool to manage the level of activity.
All this talk of taxes and expenditure cuts is dangerous in itself. A key part of Aggregate Demand is Consumption and this relies not only on income levels but also consumer confidence. Scare the households enough and they will react instinctively to the uncertainty and save more. This will reduce consumption, a component of Aggregate Demand, and so lower the level of economic activity.
A similar argument can be made for business confidence and investment, also a component of Aggregate Demand.
Below is a link to a Guardian article where former Liberal Treasurer Peter Costello says a deficit tax won't work and the head of the Commission of Audit says it will do harm.
Saturday 3 May 2014
A lower minimum wage?
The Commission of Audit, despite a poor overall analysis, suggests many sensible individual policy measures. One is the need to lower the relative level of the minimum wage.
The Commission suggest that the minimum wage should fall to 44% of the average full time wage, from the current 56%. They argue that it is currently too high to encourage employment and growth.
The standard argument is shown below.
The minimum wage is set above the market clearing rate. This encourages Q1-Q2 additional workers to seek work when they wouldn't at the market wage rate of 0W1. Also Q2-Q3 workers are not employed who would be at the market wage rate. Unemployment is reported at Q1-Q3.
Of course the argument for a minimum wage is that without it workers would receive a lower wage than 0W1 due to the relatively greater negotiating power of employers compared to employees. (The free market is failing due to market power.)
The Guardian article below outlines the case of the Audit Commission. They believe that it will help achieve full employment and future growth. However will lowering the minimum wage help the goal of equity?
Although Australia does have an absolutely high and relatively high minimum wage rate it is falling as a percentage of full time income compared to other OECD nations. When PPP is used it also looks more reasonable in comparison.
The Commission suggest that the minimum wage should fall to 44% of the average full time wage, from the current 56%. They argue that it is currently too high to encourage employment and growth.
The standard argument is shown below.
Of course the argument for a minimum wage is that without it workers would receive a lower wage than 0W1 due to the relatively greater negotiating power of employers compared to employees. (The free market is failing due to market power.)
The Guardian article below outlines the case of the Audit Commission. They believe that it will help achieve full employment and future growth. However will lowering the minimum wage help the goal of equity?
Although Australia does have an absolutely high and relatively high minimum wage rate it is falling as a percentage of full time income compared to other OECD nations. When PPP is used it also looks more reasonable in comparison.
Thursday 1 May 2014
Commission of Audit Report
I think that the Commission of Audit have been knobbled. I have not read all of their 1000 page report yet but what I have seen is clearly based on poor logic and terms of reference that presupposed the answer. I have never seen a sloppier piece of work from a government commission.
The Commission suggest privatising major parts of government, letting States run services rather than to complicated Federal/State mix that exists at present and duplicates in part and capping the Paid Parental Leave scheme. All three suggestions seem quite sensible.
However they also suggest reducing pension entitlement, cutting back on the National Disability Insurance Scheme, Co-payments on many medicare services and medications on PBS, reducing education spending as a proportion of GDP and reducing assistance for agriculture. There are other measures too. All of these seem to be a drastic attempt to cut spending.
The problem is that they base their arguments of a false premise and their own figures show that if nothing was done there isn't actually a problem.
Twice in the first pages the Commission asserts that 'Households cannot live beyond their means. Government's shouldn't either.' This was an argument much loved by Margaret Thatcher, but she knew it was based on a false analogy.
Governments, which persist forever, never retire and have credit ratings that allow persistent borrowing, are not households. You cannot make rules for the crowd based on what works for an individual. It's like saying, 'If I stand on tip toe I will see the parade better.' Except if everyone does that nobody sees better and everyone gets sore feet.
If a household borrows too much they will be overwhelmed by debt, but governments can borrow persistently and as long as economic growth is as high as the the level of borrowing (as a percentage of GDP) then the debt burden as a share of GDP won't rise. The interest burden remains manageable.
The Commission reports that it looked at a 'Business as usual' scenario and reports that the deficit by 2023/24 would be just 1.5% of GDP. That's half what it is now.
To make matters worse the Commission assume that tax receipts will flatten out. This is because they assume that the government in the future won't allow taxes to rise. This alone completely changes the expected budget outcome and is used to justify cuts. Clearly the Commission is manipulating the results to suit the Government's agenda.
The Commission, by its own admission, can't count (they claim $6,000 to $15,000 is a trebling of the figure) so we might have to treat their figures carefully. However they also show that the tax burden has hardly changed from forty years ago while real government spending has trebled (see above). They seem to prove the point that what is needed is economic growth.
The Commission suggest privatising major parts of government, letting States run services rather than to complicated Federal/State mix that exists at present and duplicates in part and capping the Paid Parental Leave scheme. All three suggestions seem quite sensible.
However they also suggest reducing pension entitlement, cutting back on the National Disability Insurance Scheme, Co-payments on many medicare services and medications on PBS, reducing education spending as a proportion of GDP and reducing assistance for agriculture. There are other measures too. All of these seem to be a drastic attempt to cut spending.
The problem is that they base their arguments of a false premise and their own figures show that if nothing was done there isn't actually a problem.
Twice in the first pages the Commission asserts that 'Households cannot live beyond their means. Government's shouldn't either.' This was an argument much loved by Margaret Thatcher, but she knew it was based on a false analogy.
Governments, which persist forever, never retire and have credit ratings that allow persistent borrowing, are not households. You cannot make rules for the crowd based on what works for an individual. It's like saying, 'If I stand on tip toe I will see the parade better.' Except if everyone does that nobody sees better and everyone gets sore feet.
If a household borrows too much they will be overwhelmed by debt, but governments can borrow persistently and as long as economic growth is as high as the the level of borrowing (as a percentage of GDP) then the debt burden as a share of GDP won't rise. The interest burden remains manageable.
The Commission reports that it looked at a 'Business as usual' scenario and reports that the deficit by 2023/24 would be just 1.5% of GDP. That's half what it is now.
To make matters worse the Commission assume that tax receipts will flatten out. This is because they assume that the government in the future won't allow taxes to rise. This alone completely changes the expected budget outcome and is used to justify cuts. Clearly the Commission is manipulating the results to suit the Government's agenda.
The Commission, by its own admission, can't count (they claim $6,000 to $15,000 is a trebling of the figure) so we might have to treat their figures carefully. However they also show that the tax burden has hardly changed from forty years ago while real government spending has trebled (see above). They seem to prove the point that what is needed is economic growth.
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