Tuesday, August 25, 2015

Miscellany - Australian foreign policy, Ashley Madison and the economic outlook

This is another piece, Bill Henson's untitled (2009-10) from the current Luminous World exhibition at the New England Regional Art Museum.

On 20 August 2015, the Secretary of the Australian Department of Foreign Affairs and Trade, Peter Varghese, gave a big-picture address to the Lowy Institute on Australia's place in a changing global and regional order. John Garnuat, the Asia Pacific editor for Fairfax Media and one of Australia's better reporters on foreign policy matters, provides a useful summary. However, the speech is worth reading since it sets out quite clearly the nature of the challenges facing Australia in evolving world.

The Ashley Madison Affair drags on and on. This is an interactive map of users world wide. The main lesson, of course, is the now oft repeated warning not to assume that data you provide or the conversations you can have on-line will be safe. We all do it, of course. Well, only 30 million or so were registered with Ashley Madison, but we all unconsciously trust the internet. It's just so bloody convenient that we ignore the risks. Reminder to self!

Earlier in August (Updating the Australian political and economic outlook) I reported on the latest economic views put forward by the Australian Reserve Bank in its Statement on Monetary Policy. In a way, the message was steady as she goes. Now today's media is full of reports on the global share crash. Should we all be worried? Well, yes and no.

On the yes side, I have felt for some time that equities were over-valued. I had no really rational reason for that view, just experience. Price Earnings ratios used to be based on the current price to previous earnings. Now they seem to be increasingly based on current prices to expected earnings. I actually have no idea what that means. I can take past earnings and adjust for projected changes, but I struggle with the idea of adjusting future earnings. I may just be out of touch of course, but it seemed to me that future earnings projections are inherently unstable. Just ask Treasurer Joe Hockey!

If equities were over-priced adjusted for risk, and risk margins have narrowed, then it made sense to expect some correction. That then flows through into the real economy via the wealth effects.People owning shares are worth less and have to adjust their spend accordingly. So a share crash affects both expectations and spend. What we don't know is the scale of the correction.

On the no side, and I am thinking especially of Australia, the crash in the value of the Australian dollar provides a certain protection. I note a certain irony here. After all the fears about the future of the Euro, the Euro has strengthened against many other currencies because it is seen as a safe currency! At least for the moment.

The Australian economy has been going through an adjustment phase. Unusually, and I know of no previous example, the country has missed (at least to this point) the bust side associated with previous resource booms. However, adjustment had to occur as resources attracted to mining were redeployed. This process takes time. The Australian dollar was unusually strong for an unusually long period. This led to a degree of contraction in non-mining trade exposed sectors. This takes time to turn around.

Assume, for the moment, that the worst case scenarios for commodity prices come about. There will be some further contraction in mining. However, cost cutting in mining has been underway for some time. Buffered by a lower dollar and with new production still coming on stream, Australia can survive the lower prices. Indeed, the collapse in oil prices means that the price effects on the non-mining sectors that might have flowed from a depreciated currency will be much muted.

The Sydney/Melbourne housing boom will end, bringing some pain. Again, that's a necessary correction, one that is already underway.

And what happens if the rest of the world collapses in economic terms, entering depression? Worst case, all bets are off. However, at the moment I can't see that happening. We are more likely to see stagnant growth while the economic imbalances work themselves out.   Perhaps not nice, but not disastrous either.          



Scott Hastings said...

To gain approval to rent a ONE bedroom unit - in Penrith not anywhere flash - requires now an income of $39000pa and it goes up from there.

[based on median price $250pw & generic rental formula of rentx6]

Jim Belshaw said...

Doubt that that ratio can last, Scott