Let’s face it – Australia is a debt junkie. Australia has zero chance of growing the economy (ie increasing GDP) without borrowing every dollar of the increase to do it. In fact, since March 2000, it has taken an average of $2 increase in borrowing for every $1 increase in Gross Domestic Product (GDP).
The graph below us a lot about the “success” of the Australian economy over the past 20 years. Peter Costello will tell you, as Australia’s greatest Treasurer, that he was responsible for a budget that was continually in surplus and that there was no net Government debt. What happened between 2000 and 2008 was, while the Government sector ran a surplus, the private sector went and borrowed 1.1 trillion dollars. In return for that investment, GDP increased by only half that – $514 Billion.
That sort of growth obviously couldn’t continue, so the private sector choked out, ushering in the Global GFC. News for the Government was that the Government sector plus the private sector plus the external sector nets to zero, so when the private sector stopped borrowing the Government had to step in.
Since 2008, the Government has increased their debt by about $600 billion, the private sector has increased debt by another $1.1 trillion, with GDP increasing by $794 billion – less than half.
So now you have a Government bolted on to a balanced budget policy (i.e. no net new debt), so they must get the private sector back on to a debt binge to make the economy grow. #WTF.
Bad news is that total credit (ABS D2 Lending and Credit Aggregates – original series) has only increased by just over 1 billion over the past 6 months and has fallen 19 billion over the past 2 months. You better believe that interest rates are going to zero or less, QE is on the table, first home buyers will get more handouts, and banks will drop their loan serviceability rates (Westpac has dropped it from 7.25% to 5.75% in July, down to 5.35% on 30th September and cap the serviceability rate at the variable rate plus 2.5%). So there now is a mechanism for serviceability rates to fall as mortgage rates fall, rather than the previous static rate.
But can the embattled consumer handle a lot more debt. The US Federal Reserve Bank of St Louis pointed out Australia’s 28 years of uninterrupted growth was a bit misleading if you didn’t count our massive population growth. On a per capita basis, Australia has had three recessions in the period. Between second quarter 2018 and first quarter 2019 we were in recession.
The Government touts its $100 billion infrastructure spending as a sign of its commitment to stimulating the economy. Unfortunately, that is over 10 years, and $10 billion per year is not that much in an economy our size ($400 per person).
One big indicator to look out for is the unemployment rate. One hour of work per week might be a job for the Australian Bureau of statistics but it makes the official figures a bit misleading. Look for research with a broader definition of being unemployed, such as Roy Morgan Research. In August 2019, they estimate that 8.7% of the workforce was unemployed and an additional 7.1% were underemployed. Any uptick in these figures will cast some serious shade over the economic prospects of our country.
Michael Cornips is the Managing Director and Founder of Emerald Financial.
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