Posted: September 06, 2006

Signs of an impending crash!

Today the ABS released the June quarter National Accounts data for Australia and confirmed that the Government's attempt to hard sell the proposition tha they are sound economic managers is falling apart. The data reveals a sharp contraction in economic activity with an annual June-June growth rate of 1.9 per cent (0.3 per cent in June quarter 2006), almost half the rate expected by the markets which have been spoon fed too much mis-placed optimism by the Federal Government.

In the June quarter businesses have been running down inventory rather than producing such is the state of demand in the economy. Despite the booming minerals sector driven by the Chinese growth experience, net exports overall is weak as is household consumption.

We have already been watching this slowdown via the rapid meltdown of the South West Sydney economy where manufacturing output is in freefall and the unemployment rate has been rising despite contractions in the labour force. All are sure signs of recession conditions in that region which is also where a lot of the record levels of household debt is being held.

Treasurer Costello, the architect of the emerging meltdown via his erroneous equation that persistent budget surpluses represented good economic management told the national press that:

We see in these national accounts very much a two-track economy in Australia ... State final demand in Western Australia in particular grew very strongly ... It is now 14 per cent higher than it was a year ago, Queensland grew very strongly but to a lesser degree and the big states of New South wales and Victoria much slower.

The reality is that: (a) the Federal Government has squeezed the domestic private sector for the last 10 years with record levels of fiscal drag - manifested in the persistent budget surpluses; (b) the financial engineers have pushed record levels of household debt onto the household sector, already squeezed for liquidity by the budget surplus obsession; (c) the debt kept growth humming along but increasingly pushed the economy into a precarious state of financial fragility; (d) the Chinese economy started to pump just as the household sector was slowing down its consumption binge and has kept the economy afloat, albeit at a reduced rate; (e) the petrol prices rises have put pressure on costs and price rises have led the RBA to push up interest rates to control inflation; (f) the dampening effect of the cost squeeze has magnified the fiscal drag coming in from the Federal Government; (g) the result is that the economy is now slowing down and awaiting a crash when unemployment starts to bite into the financial viability of the heavily debt burdened household sector. The recent interest rate rises have accelerated that meltdown.

The real culprit is the Federal Government who has eschewed its fiscal responsibilities which always have to be to create enough demand to ensure everyone who wants to work has work. With some 1.8 million Australians without enough work, more than a million without any work, there was never a case for budget surpluses. Now, the fiscal drag harvest is coming.

Blog entry posted by bill