Like many of you I watched the recent federal election debate at the national press club between Prime Minister Kevin Rudd and Federal Opposition Leader, Tony Abbott. The economy featured heavily in the debate, particularly how both parties intend on handling the economy as it slows down.
This caused me to dwell on the subject once again. Is the sky falling as some people predict or will we climb out of the economic slump sometime soon? A few months back I wrote a blog about what I thought may happen to the economy and how to take advantage of the situation. Since that time I have continued to research this subject and feel compelled to write another blog to further explore what may occur to the Australian economy. Please note I am not an economist, so anything I write is purely my view, but it is based on research from credible sources.
Unfortunately every way I cut it, I come up with the same conclusion – I think we are headed for a serious economic downturn, perhaps even a recession. I am not the “Lone Ranger” in this respect, many economic forecasters are predicting a slowdown of the Australian economy, however I wanted to piece together why this is likely to be the case.
Let’s start with what’s happening globally, after all Australia cannot be immune to world events forever. Up until now we’ve had a dream run compared to the remainder of the world, but I fear the economic tidal wave is approaching our shores.
In Europe austerity measures have been taken by many governments in response to their massive debt levels. No matter which country we look at, they all seem to be hurting badly. Spain, Italy, Portugal, Ireland, UK, France and many others are now in a deep recession, some would even say approaching a depression. There’s a lot of pain being felt by people across Europe, with unemployment levels as high as 25-30% in some countries and even higher (up to 50%) amongst younger people. Demonstrations and riots are occurring regularly across the continent, but curiously our media doesn’t provide a lot of coverage of this. Consumer sentiment and retail sales in Europe are naturally spiralling downward, with most governments still heavily laden with large debts.
Moving across to the world’s largest economy, the United States and the signs are more positive, but are they really? For the past twelve or so months, we’ve been hearing about how “green shoots” are appearing throughout the US economy. The stock market continues to climb to record highs with some large corporation reporting good growth, however most corporate earnings have been subdued at best. We then look at the unemployment rate – officially the rate in the US is currently 7.3%, however there is much debate how accurate this is, as many people have given up looking for work and are no longer recorded. Others are employed in low paid, low skill jobs on a part time/casual basis. If we looked at the real figures including underemployment, the amount of long term unemployed who have given up looking for work and the amount of illegal residents in the US who are not officially registered, the figure is more like 23%, maybe even higher! Consider this, there are approximately 47 million Americans receiving food stamps (or their equivalent) and more than 100 million Americans receiving some type of government assistance. Yes that is right, nearly one third of the US population is receiving some type of assistance relating to the necessities of living.
In 1950 there were more Americans working in the manufacturing sector than there are today, even though the United States’ population has more than doubled. The pace of manufacturing being moved offshore or simply disappearing, is staggering – since 2001, 56,000 manufacturing facilities have closed permanently in the US!
In 2001 the US economy accounted for approximately 32% of all global economic activity. By 2011 this figure dropped to just over 21%.
Official US national debt as at August 2013 is approximately $17Trillion, however what most people don’t realise is that total unfunded liabilities (relating to medicare, social security etc) is actually much more, about $125Trillion. Sounds like Monopoly money doesn’t it. I asked myself, what does $125Trillion look like? Well…. imagine a stack of $100 dollar bills laying flat in packs of $10,000 each loaded on to pallets. Now imagine that these pallets were arranged in a square configuration in roughly the size of a commercial building floor plate. Now the pallets are stacked on top of each other – guess how tall the pile of money would be? It would actually be higher than the Empire State building in New York City. That’s right a sky scraper composed of entirely $100 bills, taller than most structures in New York City! To put this quantum of debt into perspective, total GDP for the world (Gross World Product) in 2012 in nominal terms was just under $72Trillion. This means that total unfunded liabilities for the US ($125Trillion) accounted for nearly twice that of the total economic output of the entire world!
Putting aside federal debt for one moment, lets look at the state of urban decay in large cities and municipalities around the US. You probably heard about the recent news that the city of Detroit recently filed for bankruptcy. Imagine that, a once magnificent and proud city, the epicentre of world car manufacturing, is now broke. During the late 1960’s the city started to fall into decay and over the past several decades the situation accelerated, peaking in the 1980/90’s when thousands of residents left permanently in the wake of the declining car manufacturing industry and spiralling crime rates. In 1950 Detroit’s population was about 1.85Million, today the total population is barely 700,000 – living in Detroit today must truly be scary. Nearly half of the city’s street lights aren’t functional, over 70,000 homes/buildings are lying derelict and there are “no go” zones throughout the city where even emergency services rarely venture.
You could say Detroit is an isolated case and probably something that people just have to live with as part of a globalisation. Well did you know that there are 15-20 other US Cities/Municipalities on the brink of bankruptcy, many of which are facing similar social problems.
So is there no wealth left in the US? Well… yes, there’s still plenty of wealth in America, but and it is a big BUT, most of it is held by a small group of people. The wealthiest 1% of Americans have more wealth than 90% of bottom US income earners combined. Four hundred individual Americans have more net wealth than the bottom 150Million income earners in the US combined. That’s right, 400 people have more money than nearly half of the US population combined!
Now I am not a left wing, socialist extremist who doesn’t believe in a free market economy, nor am I anti-rich or anti American. In fact I believe in America, it is still the crucible of innovation, enterprise and a country of enormous potential, rich in both natural and human resources.
I do however question what is happening to the middle class in the US (not just the US, but in Europe and right here in Australia). Fundamental economic theory states that for a country to be a true democracy with a stable political system, you need to have a strong middle class. Looking at the statistics above, it looks to me that the middle class is disappearing at an alarming pace, which can only mean more difficult times ahead for the US. How difficult and how long is anyone’s guess, but with crippling debt, how can the US economy possibly recover so quickly?
Now lets talk about the factory of the world, The People’s Republic of China. As most people know, China is a manufacturing juggernaut and the second largest economy in the world. With a GDP of $7-8Trillion, China’s economy is about half that of the US, but growing rapidly – many commentators believe in 10 or so years, China will overtake the US as the world’s largest economy. But what is happening in China right now? Well, as with most countries in the world, China is not immune to the global economic downturn. Despite the slowdown in Europe, US and other parts of Asia, China seems to have shrugged off the impact, but has it really?
Over the past decades China’s economy has grown by an average of around 10% per annum, which is obviously stellar, however up until now most of it’s growth has been based on manufacturing and exporting. With the slowdown in the rest of the world subduing consumer demand, the knock on effect has seen demand for Chinese goods slowing down. Of recent time there has been a lot of focus on domestic growth, particularly building infrastructure such as highways, dams, power stations, apartments and commercial property. But again it is a big BUT, there is still only a relatively small middle class in China of about 25% of the population. That number does represent around 300 million people and is nearly the same size as the entire population of the US, however it means there are still hundreds and hundreds of millions of people still living on the poverty line in China and are not likely to be consuming at a high rate. The property market (residential and commercial) has been white hot in China for several years, spurred on by a huge amount of speculative development in the large cities. The concerning fact is that many of the buildings have never been sold or leased, in fact there is an estimated 3.8Million vacant apartments throughout the country. I recently watched a documentary which showed block after block of empty apartments, I mean ghost towns of newly constructed buildings lying completely dormant.
Sound familiar…? Wasn’t that the case (albeit on a smaller scale) in Spain, the US and other countries during the period 2001 through to 2008. A large property bubble, fuelled by vast quantities of over building. Mmmmmmm what happened to those property markets? If you look at the Chinese stock market, it is at an all time high also, however corporate earnings are decreasing due to the drop in demand for exports. Apparently the new Chinese president Xi Jinping has a different approach to the previous premier and intends on pulling in the fiscal reigns, probably quite rightly so.
Ok, what about the other manufacturing powerhouse, Japan? Well Japan has also been on a money printing spree in an effort to stimulate it’s economy, which has been in the bumbling along for the most part of two decades. Of course it is still a giant economy, however there are major structural issues facing this country. A very large proportion of Japan’s population is ageing whilst the remaining population is actually in decline. This means there will be fewer people of working age to support a ballooning baby boomer population and other funding requirements. Over the past decade, Japan’s defence force has been starved of funding, however the new Abe government intends on injecting massive amounts of capital in future years, due to rising tensions in the Asia/Pacific region. Japan has to address these issues whilst carrying one of the worlds largest public debts. That’s right Japan has a huge debt burden also – 235% of it’s current GDP!
So what does all this mean for Australia?
Lets piece it all together. Europe and the US both have crippling debt, with virtually no way to pay it back. Both economic zones have incredibly high unemployment, no real growth in their economies and rising social unrest everywhere – against this backdrop, their stock markets that have reached new record highs. This doesn’t make sense to me, it just doesn’t …..
With low demand for consumer goods across the US and Europe, manufacturing in China and Japan continues to slow down and a huge property bubble has formed in China. Chinese demand for imported raw materials including coal and iron ore has started to decrease.
In Australia unemployment is rising – officially it is currently 5.7%, however this is not the real number, not even close. If you count the amount of people who have been retrenched and paid out redundancies but are not collecting unemployment benefits and those who are classed as employed but are in part time or casual roles, the real number according to many experts is more like 11 -14%. Common sense will tell you that things are not near as rosy as the current Rudd Government would have us believe. I personally know of at least 15 people who have been made redundant from senior roles in various industries over the past 18 months. Really, 5.7%, yeah right…..
Retail sales in Australia are generally flat or in decline and consumer sentiment remains low. Vacancy rates within commercial property including shopping centres are steadily increasing. Agricultural exports have been seriously impacted of recent years and now the mining boom seems to be subsiding, exacerbated by decreased Chinese demand and the high $AUD. I can’t help but think that our stock market is a little overheated as is the residential property market, especially in Sydney.
So what happens next…. Well, no one really knows, but I think we may have a serious correction in the stock market and property market, a major slowing of exports (including resources) and higher unemployment, which means lower consumer spending. In short I believe we are heading for a major economic slowdown, perhaps even a recession further down the track. Hopefully I am wrong and this does not happen, but I just can’t see how it is avoidable when you look at all the signs, especially those evident in the large economies of the northern hemisphere.
Is the sky falling…? No, but I think we could be in for a rough ride over the next 12-24 months, however we are in better shape than many other countries.