Monday, March 5, 2012

A crisis looms in south-eastern Australia

LAST week the Bureau of Statistics revealed that more business investment in Australia now goes into mining than in all the rest of the economy put together. In 2012-13, on companies' present plans, investment in the rest of the economy would shrink while mining's share would swell to 70 per cent. Investment in the south-east, where two-thirds of Australians live, would shrink, and three-quarters of all business investment would be in WA, Queensland and the Northern Territory. Treasurer Wayne Swan hailed the figures as ''a resounding vote of confidence in our economy''.

We believe it is quite the opposite. The investment figures and other data suggest the south-eastern states - Victoria, NSW, South Australia, Tasmania and the ACT - are heading towards recession. In the past year their full-time jobs have shrunk by 38,000, and total employment by 26,000. Their newspaper job ads have shrunk by 21 per cent. Their job vacancies have shrunk by 15 per cent. Their construction activity has shrunk by 1 per cent. Their home building approvals have shrunk by 20 per cent; their retail sales volumes by 0.2 per cent. Their trend level of business investment was still rising, but December's slump and the sharp fall in investment plans suggest that too is turning. All these indicators tell only part of the story. But to see all of them heading down together is ominous. We are now two economies, and one of them is in deep trouble.

The mining economy of the north and west is running red-hot. The everything-else economy of south-eastern Australia has gone cold. The government's economic advisers meant it to be that way, although they have clearly overdone it. They believe Australia is going through a ''structural transformation'' from a diverse economy to one dominated by mining. A global shortfall of minerals has driven up commodity prices, and where commodity prices go, the Australian dollar follows. The dollar is now 50 per cent above its long-term average, making much of the economy of south-eastern Australia globally uncompetitive - in manufacturing, tourism, international education, areas of agriculture and office work that can be done more cheaply overseas. Treasury says we are still only in the early stages of this transformation.

Yet what are the government and the Reserve Bank doing? They are set on slowing the economy further. Federal and state governments are giving the budget surplus priority over jobs and growth. Treasury estimates that federal and state budget cuts will reduce Australia's growth in the two years to mid-2013 by 4.25 percentage points. The Reserve Bank cash rate is at a neutral 4.25 per cent, but governor Glenn Stevens says that is only because the banks are doing its work for it. Had bank margins remained unchanged since 2007, the cash rate would now be at least 5.5 per cent. The bank, the Treasury and the Treasurer believe that if the mining economy is running red-hot, then the rest of the economy has to run cold to prevent things overheating. They did not want it to run as cold as this, but there is no sign yet of any policy shift.

There should be. The floating dollar served Australia well for decades, but it is not serving it well now. When good businesses built up on sound plans are sacrificed because currency dealers make them uncompetitive, then policies must change. In the successful economies of Asia, governments intervene in currency markets to shield local producers. They set budget policies to moderate booms and busts, not to deepen them. They build diverse economies, not bet everything on one industry.

Our policymakers should focus on bringing the dollar down, and bridging the divide between the Pilbara and the rest of Australia. There are ways to do it: lower interest rates, intervention in currency markets, a deeper and wider mining tax and slower budget cuts. Australians will not forgive them if they just stand back and watch us hit the wall.