RECESSION DODGED: Economy grows 0.7% in June quarter

  • The Australian economy rose 0.7% in seasonally adjusted chain volume measures
  • GDP rose 1.4% in 2020-21
  • The terms of trade rose 7.0%
  • Household saving ratio decreased to 9.7% from 11.6%

https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release

So I’m no economist and there’s people around these parts more in the know than me. But figured with all the satire it would be good to have some talk around the economy rather than sign up for another fake username at that other website.

Australia dodges recession and how good is iron ore! These numbers don’t take in Sydney lockdown so next quarter is going to be interesting. With a federal election looming will our fearless leader Scotty call it early? What levers will they pull next to steer us away from a dreaded double dip recession?

Frydenborg has had a recent shift in narrative to “we must open up” and it’s clear they are worried about the budget. Do you think we will go to NIRP? The surviving small businesses that have lasted 6 lockdowns are really feeling the pinch. I don’t know how a lot of them are surviving especially hospo or tourism. I’m surprised they haven’t had another raid on super yet.

What other levers do you think they will pull? and what are you doing with investments?

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stagmal

is it all just housing. housing goes up, gdp grows, what the fuck else could it possibly be. what else is left.

Peachy

Yeah, I don’t think that there is really a Plan B that’s even conceived (let alone well developed and ready to be implemented).

if the housing play were suddenly to stop working for the EZFKA government – what are they going to do? Turn to textiles? Switch to semiconductors? Pivot to pottery?

like, really?

Anon

Immigration to 500K p/a

Peachy

We all read it here first 😉

Ramjet

NOM has been flat which is a pretty big feat given our borders are closed and we have told people to go home. The closed borders have allowed us to swap backpackers and uni students for well off returning expats and the wealthy (who else can afford business class tickets and quarantine costs?).

bjw678

When here is no plan B you really push hard to make plan A work…

Peachy

But Plan A is housing and over the medium term it *needs* migrants.

How do you reconcile that with your expectation that NSW and VIC governments have invested too much into zero-COVID to let it rip?

bjw678

Housing really isn’t the state governments plan. They aren’t judged on GDP, but more services and such.
If the hospitals get overrun it won’t be the feds that wear it, but the state gov.

Peachy

I don’t think that’s really right, I’m two levels – the average dude doesn’t make a distinction between state and fed gov division of powers and also the states need stamp duty

bjw678

What the average dude thinks is almost irrelevant. What the media portrays is what matters. The NSW gov is pushing health hard and happy to fuck the economic consequences at this point.
Stamp duty is also famine/flood due to the housing cycle.

T

Military industrial complex? Afaik, that is what is actually happening.

Peachy

military industrial complex where??? Here???

Gouda

I think the voting public is a bit oblivious to it all, so if the headlines claim that we’ve avoided the big R most they won’t pay too much attention. When financial supports like mortgage deferrals and the prevention of business foreclosures are allowed to persist, the population won’t experience widespread negative effects which is also less likely to be reflected in polling data.

While these appear to be bad for the government now, most of the polling questions are about the Covid/Vaccination response so I doubt the economic implications are a factor at this point in time. Gut feeling is that most suffering SME are going to blame state leaders for lockdown as that demographic tends to lean towards the Coalition in any case. We haven’t seen anything original, so I’d expect more stimulus and support for property, construction, banks etc.

Peachy

We haven’t seen anything original, so I’d expect more stimulus and support for property, construction, banks etc.

pretty safe bet, that.

and I think that it should pretty much work, again.

pays not to forget that, over time, the structure of the EZFKA economy has actually adapted itself for the above sort of government response, and that is part of the reason why it works so well.

there are lots and lots of people positioned to take advantage of that stimulus model (from land bankers to tradies, to bankers to realtors, to Bunnings). So when the taps are turned on, those segments leap, and those segments are large.

Gouda

I think the response to a second homebuilder builder stimulus would be muted especially with the demand being pulled forward. Would also need another round of super access, although even with this I’d have my doubts.

Am hearing more about the timber/material shortages from builder patients. I don’t get the sense that their confidence in the process is endless, and even with plenty of work in the pipeline many are talking about paying down debts quickly because they’re unsure about how long this can go on for. This probably coincided with seeing NSW shut down construction sites and wondering if it would happen in VIC.

Peachy

I think the response to a second homebuilder builder stimulus would be muted especially with the demand being pulled forward.

Yep, I think you’re largely right on that – the homebuilder can-kick probably can’t be repeated with any great measure of success (for reasons that I’ve had a go at describing below: https://www.ezfka.com/2021/09/05/recession-dodged-economy-grows-0-7-in-june-quarter/#comment-12047)

Would also need another round of super access, although even with this I’d have my doubts.

i think “super release mk2” would be even poorer than “homebuilder mk2” because it suffers even more from the pull forward effect:

  • those who had enough in super to buy into housing would have mostly done it in the first round.
  • those who didn’t have enough, probably still don’t have enough. And also housing has galloped another 20%, so that $20k or $30k or whatever they might release will buy less (indeed, it will buy absolute dick).

Am hearing more about the timber/material shortages from builder patients.

word is that in the US the worst of this is past and it’s largely resolved. So it seems like the TP situation – a rush on stock which clears out supply, then inventory takes a little while to rebuild and start flowing again. transient.

I don’t get the sense that their confidence in the process is endless, and even with plenty of work in the pipeline many are talking about paying down debts quickly because they’re unsure about how long this can go on for. 

on my end, I’m hearing about toy purchases (eg furniture, motorbikes/boats) really slowing down & people beginning to feel the pain. It’s the absence of JobKeeper – its making a difference and dampening the mood slowly.

Travis Howarth

A few thoughts…

  • Dan Andrews seems to have switched overnight to the Gladys position of ‘this virus can’t be controlled’ which kind of makes the sacrifices of 2020 look ridiculous
  • fatigue with lockdown is already reaching ‘peak’ regardless of what the shutins of twitter say. Aside from the insanity of ‘mainstream media’ drawing its views from the well known super-left views of twitter users, the results are obvious for all to see. People are over lockdown. My very elderly relatives in Victoria drove a hundred km or so to visit their son despite ‘lockdown’ and couldn’t see why it would be a problem. If they don’t care anymore, I can’t imagine Mustafa X is that worried either.
  • I still expect another round of super release sometime in early 2022 maybe when it seems the economy is going to shit itself (which it will); but it has the benefit of not turning up on the Government’s balance sheet.
  • I expect China to stimulate (what else can they do?) which will put some kind of ledge under commodities but not enough to stop a reasonably severe negative impact on Australia.
  • I expect interest rates to not move anywhere for an extended period; the TFF will make a reappearance soon enough because there is no ‘Australia’ anymore unless credit growth is strong and that means house lending (and prices up).
  • I don’t have much cash anymore, it’s all sitting in an offset account for a recently purchased overpriced house. Do I expect house prices to go up? No. But do I expect interest rates to stay low (or other measures to assist ‘home owners’? Yep).
  • Is there even a recognisable Australia anymore? At this point I say no.
Peachy

A few thoughts…

A tour de force…

Dan Andrews seems to have switched overnight to the Gladys position of ‘this virus can’t be controlled’ which kind of makes the sacrifices of 2020 look ridiculous

Doesn’t really surprise me – reality is, the current arrangement of the deck (who is rich, who is powerful, who is comfortable…. Who is not)

The current arrangement of the deck* is based on more people coming in every year – that is open borders. And making housing for them.
[* WA is different, they got mines]
the “sacrifices of 2020” were an initial response – things done to keep the machine ticking over OK without migrants.

the big levers pulled were

  1. homebuilder – to expand debt and so keep construction and banking ticking (indeed, roaring)
  2. bringing in 600,000 “stranded Australians” to take the place of the foreign inflows
  3. not letting these 600,000 people leave without a permit
  4. and the usual “lower teh rates”

but this only bought time – it’s not a sustainable new footing.

maybe it’ll take 3 years to build out enough housing and decks for the people who are locked in. Maybe 4 years.

but then you’re done. Indeed, you’re worse than done because you’ve also solved the rolling housing shortage (ie killed the golden goose).

This is why the return of open borders is almost inevitable, and so the narrative will change (/is changing)

I don’t have much cash anymore, it’s all sitting in an offset account for a recently purchased overpriced house. Do I expect house prices to go up? No. But do I expect interest rates to stay low (or other measures to assist ‘home owners’? Yep).

Good on ya, reacting to the incentives. The incentives work. Pushing on a string is a myth. Always has been.

…besides… somebody has to be the last bear 😉

Is there even a recognisable Australia anymore? At this point I say no.

This leads to an interesting question …what exactly did you buy into, then? Is it mere familiarity? Is it Medicare for you and your children? Is it the beaches?

Travis Howarth

Hey Peach, re: your interesting question at the end. What did I buy into? I was an idiot and I admit it. I knew the history of Australia well enough to see it as the resources colony (and strategic launching post/denial of other empires) it always was but grew up with what I now realise were bad examples (in terms of getting ahead). I mistook that (and my ‘education’) for being more accurate representations of the EZFKA than they were and underestimated in the extreme how little the legacy citzens, their contributions, their culture and their history were valued. Live and learn I guess.

Peachy

I wanted to comment on this too:

People are over lockdown. My very elderly relatives in Victoria drove a hundred km or so to visit their son despite ‘lockdown’ and couldn’t see why it would be a problem.

If they don’t care anymore, I can’t imagine Mustafa X is that worried either

It’s very consistent with what I’m hearing. We’ve had peak lockdown already.

It really depends on voluntary compliance to work, and we’re past peak voluntary compliance.

more and more people are taking liberties (haha, “taking liberties”) because they can’t be bothered anymore. And the virus isn’t as scary anymore.

Gouda

Hah, and here I was thinking I was the last bear. Currently cash is also all in the offset for an overpriced PPOR, but this will hopefully be filled by the end of the month. If I can do this, have worked out that over the life of the loan term the total paid out in interest and loan servicing fees will equate to about 1% of the borrowed amount.

Travis Howarth

I’m not in as nice a position – my equivalent expected interest over the loan is about 8% of the loan amount – but in my case the options were high rents (ongoing) or take a punt on lower interest rates for longer.

They would need to go up quite a bit for my mortgage+community title fee+council+maintenance to equal rent-bank interest after tax – and over even five to ten years, at worst I’ll probably be even but at least haven’t had to worry about being moved on or quarterly inspections.

As it is though the identical place next door to mine is currently up for sale for just over 10% more than I paid in early 2021. Not saying they are going to get the asking price but even if they get 5% more that’s a huge hit I avoided by going all in on ‘overpriced’ real estate.

Freddy

Central Banks have basically gone all-in on lowering interest rates to try and stoke inflation. They have also made it clear that they will “let inflation run” which is code for not raising rates until wages rise adequately to cope with higher debt repayments.

Consider the following upward pressures on the Australian dollar over the last 20 years:
1) Australian interest rates have been higher than USA, Japan, etc. There has been a carry trade into AUD.
2) Australian household debt reaching such stupid levels that more than 40% of mortgage debt has been funded offshore. More foreign currency converted to AUD.
3) Perpetual property boom means more money coming into Aus.

We now appear to be reaching a tipping point where:
1) US rates are higher than Aus for the first time in a long time
2) RBA have started to replace more expensive offshore funding with TFF
3) Perhaps still more to go for boom times…or is there….

So what happens if USA gets their wage inflation and EZFKA does not?. i.e. we open up the borders to more slave labour to keep wages suppressed. The differential in interest rates would see the AUD fall a long way.

Peachy

Good summary, Freddy. Concise and to the point.

there are two conversations that I’d be interested in:
1) the idea of inflation (in particular wage inflation) and what this actually looks like in reality; whether the banks would actually allow it/wear it (lending high value dollars, being repaid in much lower value dollars). Suspect they’d need to be “compensated” by effectively-free funding and loan guarantees from gov’t
2) the “so what” of significant AUD devaluation. Starting thesis is that it doesn’t change much for EZFKA inhabitants, just makes the less well off ones even less well off. (Eg Those that couldn’t afford a house still can’t afford a house. But now they also can’t afford a new car every 7 years)

Freddy

I don’t think the banks would give a shit. It is not their money being lent and repaid. They just clip the ticket.

The problem with falling AUD is it doesn’t just affect those who already can’t afford a house. Large price rises from imports would sap the disposable incomes of those servicing their mortgage. RBA would be snookered.

Last edited 10 days ago by Freddy
The90kwbeast

The AUD always seems to counterweight whatever happens here anyway.

Global growth goes up, $AUD rises, means our economy can import and consume more

Growth goes down $AUD tanks, rates go down to support consumption

That’s a basic and incomplete summary but you know what I mean hopefully 🙂

Peachy

I don’t think the banks would give a shit. It is not their money being lent and repaid. They just clip the ticket.

Im not sure about that. The received wisdom is that banks aren’t in the business of lending at below-inflation rates. It kind of makes sense, because doing so would, over time, shrink their balance sheet.

now, I know that we’re not exactly in Kansas anymore, but there is a fundamental point here to be addressed. Which is what I’m getting at when I talk about the need to compensate banks.

To illustrate, assume you have a $100b balance sheet and 0% funding costs (thanks RBA!). If you lend at 2%, in 10 years you’ll have $120b (ignoring compounding).

Now, that looks like a good wicket, but if inflation has been running at 7%, then your $120b balance sheet is actually worth less than what the old $100b was worth 10 yrs ago…

Freddy

Let’s be specific:

  • 7% wage inflation vs zero funding cost
  • lending (non) standards maintained

In that instance, debt-to-income would be maintained and the balance sheet would expand in line with wages. I could make the argument that if we get that high wage inflation and that low mortgage rates then there would be substantially higher demand for assets, and for people to borrow more than they can initially cope with in the expectation that wage rises will save them.

Peachy

I see where you’re going with this, but remember that we’re dealing with national aggregates, not just a few blokes getting a pay rise.

7% wage inflation will inevitably, to a significant extent, be translated to falling purchasing power of each dollar. It will allow consumer prices to climb, which they certainly will. Over time, this will add up to currency debasement.

the only difference to the “printing” kind of currency debasement are the distributional effects – distribution will tend to eb slanted towards labour and away from capital.

could make the argument that if we get that high wage inflation and that low mortgage rates then there would be substantially higher demand for assets, and for people to borrow more 

this rings true, if we grant for the sake of argument that banks will lend (more likely: are forced to lend at rates below wage growth rates).

In EZFKA of course this means demand for land. In the US it’s not such a one-way street though…

The90kwbeast

I think the better starting point to Freddy’s questions, and they are good ones, is the likelihood of US wages growth recovering so much the fed hikes rates to anything more than say 1%. I’d assess that, in particular the need to hike rates, as low.

Rates can’t go up meaningfully as it’ll crash the whole system..

Peachy

The thing about US wages growing at any rate is exactly the same as what I point at with EZFKA wages.

inflation tends to rape banks. With or without the Fed doing anything, intuition tells me that there is little change of wages growth outpacing the cost of debt….Not without the finance sector being allowed to wear the costs & shrink… and that hasn’t been the way that the game has been played.

I don’t think that Biden is the bloke to reverse the flow.

Peachy

However there would be huge issues, and at the end of the day house prices would probably inflate right alongside the currency leading to the exact same situation we are in now

Careful, DD… a few more steps down this path and you’ll be claiming that there’s an underlying housing shortage of some sort that prevents the cost of land shrinking relative to wages….

Coming

There is an obvious scenario in which exactly this would occur

rising interest rates

wages up
—> inflation up
—> interest rates up
—> house prices down

this would probably need to be a stagflation type wage increase presumably due to reduced immigration (which would also reduce house prices even more)

Which is why it will never be allowed

Freddy

I alluded to this in a response to Peachy. Actually, I implied it would be worse because people would start to factor in future wage rises rather than what they could afford to pay off now.

 I could make the argument that if we get that high wage inflation and that low mortgage rates then there would be substantially higher demand for assets, and for people to borrow more than they can initially cope with in the expectation that wage rises will save them.

Ultimately, I don’t believe we are getting any significant wage inflation in Australia via demand for workers. I can see the potential for shenanigans when we go completely cashless. e.g. govt can mandate a 5% pay rise across the board and it happens instantly at the start of new financial year.

I probably shouldn’t give these fuckers ideas.

Ramjet

TFF will be in overdrive well before Christmas. My guess is that the September quarter will be negative growth and same with the December quarter unless Retail spending goes into overdrive.

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