Australia takes centre stage

Today all roads seem to lead to a place “down under” as President Biden put it last night. Although in that particular instance it looked to be driven by the fact he had forgotten the name of the Australian Prime Minister Scott Morrison. But there was something of a geopolitical shift going on with the new alliance AUKUS as a place we have christened the South China Territories increasingly faces up to its rather exposed position. Switching to the economics a nuclear powered submarine programme is a big deal.

Australia will build at least eight nuclear-powered submarines under a historic new military alliance with the United States and Britain, dumping the troubled $90 billion future submarine deal with France. ( Sydney Morning Herald )

Defence projects invariably take longer and are more expensive than badged as the price of the French deal had risen by $40 billion. A plus in this instance is that the UK ( Astutes) and US ( Virginias) are being built so the technology exists. So whilst much work will be in Australia and Adelaide in particular there will be work and exports for the UK and US. So we have in economic terms a tangled web if we add in that Australia is building these to defend itself from its biggest customer.

Reserve Bank of Australia

Regular readers will not be surprised to learn that the first article in its September review is not only about the banks but also a subsidy to them.

The facility has provided low cost threeyear funding to banks operating in Australia. As for all central bank funding, funds are lent against high quality collateral.

There is an echo of the geopolitical move as this was a copy of the Bank of England scheme. Central bankers are pack animals and imitation is the norm as well as being the sincerest form of flattery.

The funding was cheap with another UK copy in the interest-rate.

In November 2020, the cost of new funding
under the TFF was lowered to 0.1 per cent in
line with reductions in the target cash rate and
the three-year government bond yield target.

There was also lots of it.

The TFF has provided $188 billion in funding to
banks since its inception. This funding is equivalent
to 4 per cent of banks’ non-equity funding
, or 6 per cent of credit.

According to the RBA research the banks were saved around 0.5% on average and with our experience from the UK let us skip the small business lending hype and cut to the real event.

Rates on outstanding variable-rate housing loans
have declined by around 55 basis points since
February 2020, while interest rates on outstanding
fixed-rate housing loans have declined by around
140 basis points.

As an aside we see another incentive for more fixed-rate mortgages as we look at the scale of the moves.

House Price Rises

This was of course the endgame. How is that going?

Weighted average of the eight capital cities

  • rose 6.7% this quarter.
  • rose 16.8% over the last twelve months. ( Australia Statistics )

Even by UK standards that is quite a surge and no doubt the RBA will be able to feel that it can stand tall in central banking circles. Indeed it will be beaming with pride at this part of the announcement.

The preliminary estimate of the total value of residential dwellings in Australia in the June quarter 2021 was $8,924.6 billion, up $596.4 billion from $8,328.1 billion in the March quarter 2021. This is the largest rise on record for the series.

Of the total value of residential dwellings, $8,527.6 billion was owned by households.

the mean price of residential dwellings rose $52,600 to $835,700.

There will be a race amongst the Phd researchers to be the first to claim large wealth effects on economic output and hence GDP from this. Missing will be several relevant facts.

  1. You cannot sell the market in one go or if you prefer these are marginal and not average prices
  2. Some will sell and make the gain but not many and other ways of gaining ( equity release and remortgaging) are relatively small fry.
  3. This ignores the inflationary impact on both first-time buyers and those trading up

Considering the size of Australia the rises seem pretty consistent.

rose in Sydney (+19.3%), Canberra (+19.1%), Hobart (+17.7%), Melbourne (+15.0%), Perth (+15.0%), Brisbane (+14.6%), Adelaide (+14.2%), and Darwin (+12.8%), over the last twelve months.

Let me just remind you the extraordinary nature of this as the numbers are that in isolation but when you add an economic plunge it adds to the extraordinary nature.

Population

The numbers this morning showed a bit of a change.

Population growth over the past 12 months was entirely due to natural increase (adding 131,000 people), while net overseas migration was negative (-95,300) over the period, the first time since 1946. This continues the recent shift from the long run trend of net overseas migration driving the majority of Australia’s population growth.

So the opposite of our Turning Japanese theme as there is natural population growth and Australia has both space and resources for them. But switching back to housing it seems to not really be a factor when we note there are more houses.

the number of residential dwellings rose by 44,400 to 10,679,500. (Quarterly)

Labour Market

Hours Worked

Let us go straight to the best signal from this morning’s release.

Hours worked decreased by 3.7% (in seasonally adjusted terms) between July and August 2021, while employment decreased by 1.1% or 146,300 people. The fall in hours worked followed falls of 1.8% in June and 0.2% in July, reflecting the increase in lockdowns and other restrictions during this period.

This is a bit of a grim move as things turn down in a land under. If we look back hours worked had exceeded the March 2020 by 2.9% in May but the overall impact of the declines since have reduced it to a 2.9% decline in August. So contrasting with this week’s numbers from the UK in two respects. The decline is smaller compared to our one of circa 5% but the direction of travel is of decline and not gain. Actually let me add a third issue which is in their favour in that they are heading for summer and us winter which via Covid-19 may also be in play.

As we see so often the unemployment rate was a poor guide to what was really happening.

The unemployment rate decreased by 0.1 pts to 4.5%

The unemployment rate was 0.7 pts lower than March 2020

Although the underemployment rate did much better.

The underemployment rate increased by 1.0 pts to 9.3%

The underemployment rate was 0.5 pts higher than March 2020

Also their measure of wage changes looks to be working a lot better than ours.

The full-time adult average weekly earnings increased by 1.5 per cent between November 2020 and May 2021, reflecting the further shift towards a more typical earnings distribution and more usual six-monthly change in average earnings.

Comment

There are quite a few strands to this saga. The Aussie economy has been pulled into reverse by the lockdowns which in the very short-term seem to be going nowhere. But the move into summer should help. As long as they can keep people working then the European energy crisis will be a boon for the resources sector.

MELBOURNE, Sept 16 (Reuters) – Australia’s Environment Minister Sussan Ley on Thursday approved an expansion of a Whitehaven Coal (WHC.AX) mine ………..Australia, the world’s biggest coal exporter,

Oh and we are back to China again.

 Coal accounted for around 60 per cent of China’s energy use in 2018,…… By value, Australia’s fossil fuel exports mainly comprise thermal coal (4 per cent of total exports), coking coal (7 per cent) and LNG (10 per cent). ( RBA)

But the answer according to the RBA is to flood the banks with cheap money so they can offer cheaper mortgages and pump up house prices. I often wonder at what point the young rebel against this especially as they now face higher energy bills?

The Consumer Price Index (CPI) rose 0.8% this quarter.

Oh and housing costs were recorded as falling 0.2% over the past year. I would say that you could not make it up but of course they have,

 

 

 

12 thoughts on “Australia takes centre stage

  1. It’s really hard to believe that anyone is stupid enough to sign up to any kind of defensive alliance with the USA in the light of recent events.

    America first becomes America only.

  2. Great blog as usual, Shaun.
    The house price surge in Australia is not as great as Canada’s. The Teranet National Bank HPI showed an inflation rate of 17.8% in August, a record since the 11-city composite index started in March 1999. In the federal election here all discussions of our runaway inflation quickly switch to the issue of housing affordability. This is always discussed without paying any attention to the role of monetary policy in driving housing prices up, or the social engineering policies of our Liberal government that would hike the number of immigrants and create more demand for shelter, putting a strain on both the housing and the labour market.
    I recently revised and updated my paper for this year’s annual Canadian Economics Association meeting, “The 2021 Renewal of the Inflation-Control Agreement Should Exclude Mortgage Interest from the Target Inflation Indicator”, which has a number of paragraphs on the inflation targeting policy of the Reserve Bank of Australia. The Canadian CPI estimates in the paper are updated to July 2021 and I won’t update them any further, even though the August 2021 update contains a fresh record decline for the mortgage interest component.
    By the way, I got an e-mail from Thomas Carter of the Bank of Canada, acknowledging errors in the treatment of the Swedish Riksbank in the 2020 paper that he co-authored “Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced Jurisdictions”, and said these would be corrected in a revision. I apologize for the rather mean-spirited comment I left on that paper in one of your earlier blogs. Just the same, I still think the Bank of Canada, like some other central banks, is too much inclined towards marking its own examination papers.

    • Hi Andrew and thank you

      I review things like you comment below both sadly and a confirmation I was right in arguing as I have done for the last decade that you need house prices in inflation measures or they will be pumped up.

      “In the federal election here all discussions of our runaway inflation quickly switch to the issue of housing affordability. ”

      Or to be more specific you need a cost of living measure which is less easy to manipulate than a macroeconomic one.

      As to your correspondence with Thomas Carter he has behaved with manners and now you have, what is wrong with that?

      In other news I have been looking at one of your specialist areas which is the treatment of seasonal goods. How do you think the measurement is standing up to the era of imputations and now ( for example from July for UK airfares) a return to actual prices?

      • Thank you for your reply, Shaun. As far as I know, air transport has never been seasonally weighted in any country’s CPI. Package holiday trips have been, notably by the UK and Ireland, where air fares are often a big component of the costs. There seems no good reason for it. One would think air fares would be given seasonal weights, and other forms of intercity transportation also. I can’t speak for other people, but this pandemic has made me take the Balk formula more seriously for use in official consumer price indices than I did previously. Both the Rothwell and Balk formula imply monthly baskets for seasonal goods, more specifically, monthly quantities purchased at basket reference year prices. However, the monthly seasonal profile is fixed for a number of years with the Rothwell formula. In the Balk formula it reflects the current year, and so changes every year. One avoids a lot of imputations during a pandemic using the Balk formula. If flights between the UK and some COVID hotspot are suspended, these flights just drop out of the Balk index. I never gave pandemics any thought when I was writing about monthly baskets in the past. If I ever publish anything about them again, I will certainly give them a mention.

    • Hi Peter

      I remember him for the ZX computer and that is being added to tonight by all the Daley Thompson mentions on social media. For those unaware the most popular game was Daley Thompson’s Decathlon and I think many are reliving their youth. Daley is still often to be found at Battersea Park running track on a Saturday morning so I may get the chance to ask him what he thinks about it?

      Up where I live I fear for anyone in a Sinclair CV but the man had great drive and ambition and so RIP to him.

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