Wednesday, March 14, 2012
This time last year the Reserve Bank forecast that Australia's GDP would grow by 4.25 per cent over 2011. Even after the Queensland floods it still forecast this, implying a growth rate of 6 per cent over the second half of the year. In the May budget, Treasury raised its growth forecast for the 2011-12 financial year to 4 per cent.
Last week the Bureau of Statistics reported that the economy actually grew 2.3 per cent in 2011. In the second half of 2011 it grew at 2.5 per cent. It has added just 10,000 jobs in a year. And, above all, a sharp divide has opened up between the mining states of the north and west and the everything-else economy of the south-east, where two-thirds of Australians live.
What went wrong?
Quite a few things. First, officials underestimated the strength of the headwinds created by the combination of a dollar at record highs and interest rates at relative highs. Outside mining-related areas, growth in 2011 was minimal, yet home mortgage rates are still at 2005-06 levels. Small business overdraft rates are at the levels of late 2007, when the Reserve was trying to slow down an overheated economy.
Isn't that the fault of the banks? No. The Reserve's chiefs tell us that had the banks not raised their margins, they themselves would have lifted the cash rate to force retail rates to these levels. They think interest rates are where they should be.
Second, market fears over Europe have been a factor, exacerbating the rise in the dollar. But it would be ludicrous to pretend that Europe made more than a minor contribution to our two-speed economy.
The government and the Reserve also made two policy errors. Their goal was to ''make room'' for the mining boom by slowing down the rest of the economy. This would ''free up resources'' so that the mining boom could go ahead without sending inflation out of the Reserve's comfort zone, as it had in 2007-08.
Their goal was to slow down activity in the labour-intensive sections of the economy - manufacturing, retailing, tourism and all manner of services - to allow a boom in mining, which is highly capital-intensive. Clearly, that would hurt jobs.
Mining produces about 10 per cent of Australia's GDP, but employs only 2 per cent of its workers. Much of the activity now is in mining construction, but that is capital-intensive too.
In the year to November, when annual job growth was 63,000, the 50,500 jobs gained in mining and construction employment were outweighed by 51,500 lost in manufacturing alone. Three months later, the bureau estimates that in the year to February Australia added just 10,000 jobs. Updated figures on Thursday could show most of the economy shedding jobs.
This should have been predictable. If you shut down activity that employs a lot of people to ''make room'' for activity that employs few people, jobs growth will suffer. If you do enough of it, it will go backwards, as it is now.
Aren't there flow-ons from mining to the rest of the economy? Yes. Treasury deputy secretary David Gruen estimates ''the mining-related economy'' - ''those parts of the domestic manufacturing, construction and service industries that directly contribute to mining production and investment'' - has swollen from producing 4 per cent of GDP to 9 per cent.
Some of that is in the south-east. But the data is clear: the ''trickle down'' to south-eastern Australia from the mining boom is a trickle. What the high dollar and high rates are doing is not.
But aren't mining profits spent in Australia? When they fund more mining investment, yes. But there is less flow-on from mining dividends: 80 per cent of our mining shares are owned overseas, and most of the Australian shares are held by super funds whose job is to save, not spend.
That leads to the second policy error: the failure to realise that a mining boom with high interest rates would divide Australia into two economies.
The Reserve Bank has been preoccupied with ensuring that it does not let this mining boom unleash inflation as it did in 2007-08. In effect, it has set monetary policy to meet the needs of that industry, and not the mainstream of the economy, as it is meant to do.
Julia Gillard and Wayne Swan locked themselves in to delivering a budget surplus for political reasons. That will give Australia a contractionary budget when we need an expansionary one. The Coalition is not even at the game; they're out at some other field promising big spending cuts and job cuts, which would put the south-east in deeper trouble.
The Reserve needs to show the humility, and integrity, to admit that it got it wrong. Interest rates are far too high for the mainstream of Australia's economy. Swan and Gillard should find the courage to also change course and produce a budget that meets Australia's economic needs, not their political ones.
To err is human. But not to correct one's errors, when one can, is perverse.