Tuesday, August 23, 2011

Do we need industry when we have a mining boom?

THE drastic cuts at BlueScope Steel raise two key questions. Does it matter to Australia if we have a steel industry or not? And if it does, is it worth trying to keep it?

We could ask the same questions about whether Australia should keep making cars. We could ask the same questions about whether we should keep manufacturing anything.

The record dollar is slowly driving Australian manufacturers out of business. With each cent the dollar rises, their import competitors become cheaper and their exports more expensive.

From 1985 to 2005, the Australian dollar averaged US75¢. It has now risen 40 per cent above that to around $US1.05.

That shift has made imported goods 30 per cent cheaper - and our exports 40 per cent more expensive. Australian manufacturing is slowly being crushed. Why has the Australian dollar risen so much? Firstly, because our mineral export prices have risen to record levels and the Australian dollar tends to rise and fall with them.

Secondly, our interest rates are now far higher than in other AAA-rated countries, offering investors juicy returns. Also, the Reserve Bank keeps hinting that it will raise rates higher still.

Thirdly, while most Asian countries (such as China) keep their currencies low to boost local output, ours floats freely. The Reserve at times has intervened to stop the dollar falling, but never to stop it rising.

Nor would it. The Reserve is obsessed with the mining boom and thinks the big threat to Australia is inflation. To contain prices, it is reining back the other 90 per cent of the economy. Its hints of more interest rate rises keep pushing the dollar higher.
Does it matter if Australia becomes, in Kevin Rudd's words, ''a country where we don't make things any more''?

Treasury and the Reserve say it doesn't. They think mineral prices will stay high for decades, keeping the dollar too high for manufacturing to survive. They say we will ship out so many minerals, we won't need it.

Others see that as reckless. Mineral prices could fall sharply. But when factories close, they don't reopen.

To avert that would require big policy shifts, not Band-Aids. The risk is that we will lose manufacturing permanently for a mining boom that turns out to be only temporary.


Wednesday, August 17, 2011

Clyde Holding - a true Labor guy'

National Archives
BENEATH the brilliantly coloured stained-glass ceiling, a galaxy of Labor and Aboriginal leaders past and present gathered yesterday in the Great Hall of the National Gallery of Victoria to farewell their quick-witted, combative, arts-loving larrikin mate, Clyde Holding.

Victoria's Labor leader from 1967 to 1977, then a federal minister in the Hawke government from 1983 to 1990, Mr Holding died aged 80 on July 31 in a Castlemaine nursing home. Yesterday, he was honoured with a state memorial service, where Premier Ted Baillieu sat stoically as former prime minister Paul Keating and others poured praise on a man remembered as "a true Labor guy".

Aboriginal leaders Mick Dodson and Marcia Langton paid tribute to the former minister for Aboriginal affairs who first put forward a national land rights act and handed Uluru back to its traditional owners.

Prime Minister Julia Gillard recalled that while Mr Holding's push for a land rights act was blocked by his boss, Bob Hawke, Mr Holding responded with typical cheek and courage by funding Eddie Mabo's ground-breaking native title claim in the courts  although the Commonwealth was the defendant.

Mr Keating led the mourners, recalling his old friend's elation when the High Court eventually upheld the Mabo claim and the Federal Parliament finally recognised native land title in law.

"He was a character, but a character with a heart and a soul and a sense of mission," Mr Keating said.

"He was funny, he was a raconteur, he was a showy man, but he was always a very serious man . . . He had the fight in him, he had integrity of purpose and he had compassion and understanding.

"He had imagination. Everyone imagines things, but Clyde was one of those who develop their own model of how the world could be made better and had the courage to follow it through thick and thin."

Professor Dodson said he had crossed swords with Mr Holding during his four years as minister for Aboriginal affairs, but found him "a thoroughly decent man, a man of his word . . . He gave us hope, he gave us some vision that the future might be different for us."

Former foreign minister Gareth Evans recalled other sides of Clyde Holding, such as the night they first met at a vigil outside Pentridge on the night before Ronald Ryan was hanged in 1967.

A video of Mr Holding's life ends with an image that sums him up. After the speeches at the Uluru handover  from which Mr Hawke, fearful of the white backlash, stayed away  a plane flies overhead trailing a hostile banner: "Ayers Rock for all Australians."

Mr Holding stayed watching it, his eyes squinting into the sun, his jaw jutting out in defiance.


Wednesday, August 10, 2011

Shaky sharemarket fails to stir economy

THE Australian sharemarket is being thrown down, then up, as fear and hope fight it out on the global stage. But what does this mean for our economy?

Most likely, not much. Markets plunge and soar, but the economy is doing neither. All this year it's been muddling along, stuck in second gear. And it will probably keep on muddling along in second gear.

You wouldn't guess that from the sharemarket. At one point yesterday, a fortnight of fear and panic had wiped about $240 billion off the value of Australian stocks and knocked trillions of dollars off global wealth. That's a big hit.

But then, sharemarket money is not real, unless you're selling. The benchmark S&P/ASX 200 index hit 6829 in late 2007, sank to barely half that in early 2009, rebounded to just under 5000 last April, then started leaking slowly, until fears over the parlous fiscal state of US and European governments turned leak into flood.

The S&P/ASX 200 index closed at 4603 on July 22, then started sinking. By Monday it dropped to 3986, then yesterday to 3766 before abruptly flying back up to close at 4035. Traders attributed the rebound to heavy buying in their own markets by the Korean and Taiwanese governments.

That's probably not the strongest basis for a rebound in Australia or anywhere else. This play could have many scenes left. Confidence is fragile, and global confidence will stay down until there is firm ground to support it.

Last week's debt deal in the US was essentially a decision by the Republicans to keep the US from defaulting on its debts, but to block any long-term correction to the US government's unsustainable fiscal course while President Barack Obama is in office.

The markets, and ratings agency Standard & Poor's, saw this as a road to ruin. The Republicans set down markers (such as preserving tax loopholes) which would equally prevent a Republican White House from getting the US back on track. The markets were falling fast even before S&P stripped away Uncle Sam's triple-A credit rating.

About time, we Victorians might say. Remember how in the '90s, the ratings agencies demoted Victoria two notches  when even under the financial foot-binding of the old Loan Council rules there was no risk of Victorian governments defaulting on debt payments?

Yet last week, the US House of Representatives went to the brink of voting for such a default.

S&P has started to apply the same rules to the US as it applies in rating other governments. It knew this would lead to turmoil on financial markets, but judged it better to pull the plug now than to keep up the pretence that buying US securities is risk-free.

Bill Gross, who runs the world's biggest bond fund, PIMCO, applauded. "S&P demonstrated some spine," he said."They spoke to a dysfunctional political system . . . they finally got it right."

Fiscally, Australia is a sharp contrast to the US. Its net debt is only 6 per cent of GDP and projected to be back in the black next year. That might prove optimistic; growth is unlikely to be as strong as Treasury projects. But as former Reserve Bank board member Warwick McKibbin puts it, "surpluses are not the be-all and end-all of policy". If things do go wrong, Australia has one of the few Western governments in a position to respond a second time.

Whether things go wrong for us will depend more on what happens in China than in the US or Europe.


Monday, August 1, 2011

The CPI is not a credible basis for policy action

TOMORROW the Reserve Bank board will decide whether to raise Australia's interest rates, lower them, or leave them unchanged. The consensus among economists and markets is that it will leave them unchanged. You hope they're right but it's not certain.

There is no data the Reserve focuses on more than the consumer price index. Its job is to keep inflation low, and the economy growing. The CPI measures whether or not it is succeeding. If inflation starts climbing too fast, it signals that interest rates need to rise.

Last week's CPI figures seemed to send that signal. The CPI climbed 0.9 per cent in the June quarter, and 3.6 per cent in the year to June well above the Reserve's target to keep inflation, on average, between 2 and 3 per cent over the long term.

Banana prices had a bit to do with that. But what really mattered was that the Reserve's measures of underlying inflation rose 0.9 per cent in the June quarter, after similar rises in March. The annual growth in underlying inflation was within the target range, at 2.7 per cent, but in the first half of 2011 it grew at an annualised 3.5 per cent again, well above the target.

Bankers Trust chief economist Chris Caton summed it up well. If this was the only data you had on the economy, he said, the Reserve would have a clear-cut case to raise interest rates. But it is not the only data we have. And the closer you look at it, the less clear-cut the case is.

The other data tells us that the economy is in a weak condition, outside mining and mining investment. That means the surge in underlying inflation is more likely to be a passing blip a rebound from very low rises in 2010 than the start of a dangerous rise.

A close look at the inflation data confirms this. The weightings given to items in the CPI are based on an old survey of household spending. But the Australian Bureau of Statistics changes them to reflect price rises and falls, assuming that we keep buying the same quantities of goods regardless of price changes. That defies reality, and over time, creates a bias that overstates the inflation rate, as the index increases the weight of items that rise in price, and decreases the weight of items with falling prices.

(We leave aside the third reason to be wary of pulling the interest rate trigger: the slowing global economy, and the serious risks facing it as a result of the prolonged budget standoff in Washington, and inevitable debt defaults by governments in Europe. This is no time for crazy braves.)

What do we know about the economy that should make the Reserve sit and watch for now? Plenty. The strength is largely confined to mining and mining construction. Weakness has now engulfed most of the economy. The broader-based the indicator, the clearer it is.

Jobs growth has slowed to a virtual halt. Even on the smoothed trend figures, the bureau estimates that Australia added just 38,000 jobs in the first half of 2011, compared with 188,000 in the second half of 2010.

There is no light on the horizon. The ANZ job advertisements index says job ads have been shrinking since April. The bureau's employer surveys report job vacancies shrinking since February.

The Reserve's own figures show credit growth has fallen to recession levels. In the first half of 2011, credit basically, the amount we owe the banks rose at an annualised rate of just 3 per cent. Even borrowing for housing is growing at just 5 per cent. Borrowing by business is flat.

Consumer confidence has fallen back to GFC levels. Business confidence is below sea level. In this environment, you need a very, very good reason to raise interest rates and the CPI is not it.

It shows inflation is low in most of its 90 sectors of consumer spending. In the year to June, a third recorded falling prices, a third recorded rises within or below the target, and a third recorded price rises above 3 per cent.

It is a similar story even in the first half of 2011. The unweighted median price rise of those 90 items was well inside the Reserve's target zone. But the weighted median was outside it, partly because the index over time overstates our spending on items with rising prices, and understates spending on those with falling prices.

Take bananas and computers. When this series began in 2005, fruit and vegetables comprised 2.1 per cent of our spending, and computers 1.5 per cent. But fruit and vegetable prices have soared since cyclone Yasi, while computers now pack far more power than in 2005.

But the bureau assumes we still buy just as many bananas, even at $12 a kilo, and buy 2005-strength PCs very cheap. So the CPI is estimated on the basis that fruit and vegetables now comprise 3 per cent of our spending, and computers just 0.5 per cent. And that is wrong.

Likewise the CPI seriously overstates our spending on tobacco, and understates spending on mobile phones. And when the weights are wrong, that means the data itself is also wrong.

The Reserve faces a tough call. But it must not jump at shadows. This is a weak economy; it has time to wait. The next CPI figures will be based on a 2009-10 survey of household spending. That will restore the CPI as a credible basis for policy action.