US Economic News

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US existing home sales fall in August
AP SEPTEMBER 23, 2014 12:45AM

Fewer Americans bought homes in August, as investors retreated from real estate and first-time buyers remained scarce.

The National Association of Realtors says sales of existing homes fell 1.8 per cent to a seasonally adjusted annual rate of 5.05 million.

That snaps a four-month streak of gains.

August sales are down from a July rate of 5.14 million, a figure that was revised slightly downward.

Much of the slowdown came from the exodus of investors, who had been buying properties in the aftermath of the housing bust and recession.

Investors accounted for just 12 per cent of August purchases, compared to 17 per cent a year earlier.

Overall, the pace of home sales has dropped 5.3 per cent year-over-year.

Rising prices through much of 2013 and weak income growth priced out many would-be buyers.

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Fed bellwether tips rate hike in mid-2015
DOW JONES NEWSWIRES SEPTEMBER 26, 2014 4:00AM

Federal Reserve Bank of Atlanta President Dennis Lockhart has said he still believes the central bank will be able to hold off on raising short-term rates until well into next year.

When it comes to boosting rates off of the current near-zero levels, "I continue to expect conditions for liftoff to ripen by the middle of 2015 or a bit later," Mr Lockhart said. But he added the timing of Fed actions "isn't foreordained. The performance of the economy in the coming quarters should and will dictate the timing of liftoff."

Mr Lockhart's comments came from the text of a speech prepared for delivery before a local group in Jackson, Missouri. He spoke in the wake of last week's gathering of the Fed's monetary policy setting Federal Open Market Committee. Then, officials decided to press forward with their wind down of their bond-buying stimulus effort, as they continued to indicate that they will not raise the cost of borrowing in the US economy for a "considerable period."

Most Fed officials believe the central bank won't start to end its ultra-easy money policy stance until next year, with key officials favouring holding off until around mid-year. Mr Lockhart is considered to be a centrist on the Federal Open Market Committee and a bellwether of Fed thinking, and his views underscore the idea that rate increases still lie well into the future.

That said, Fed officials have been working to drive home the point that the monetary policy outlook isn't driven by a calendar date and whatever action the institution takes will be determined by how the economy performs. At the same time, several Fed officials have made the case that a better-than-expected pace of improvement in job gains could move forward the timing of rate increases.

Mr Lockhart was broadly upbeat about the economy in his speech, noting "the recent run of data has been encouraging in many respects." But he also said more progress needs to be made, in a climate that is bounded by considerable uncertainty.

The official said US growth likely will come in at around 3 per cent over the second half of the year and stay at that level in 2015. He sees further job-market improvements coming at a "steady pace" and reach full employment in late 2016 or early 2017, while noting the labour market is still "some distance" from reaching the levels he would like to see.

Mr Lockhart expects to see low levels of inflation continue to tick higher toward the Fed's 2 per cent goal, but noted its current weakness is a sign that the economy still needs to heal further. He isn't worried about a break out in inflation and remains more concerned about falling persistently short of the Fed's inflation target.

Mr Lockhart addressed rising concerns that financial markets may be overheating in the wake of several years of super-aggressive Fed policy. Holding off of rate increases, he said, is unlikely to ring on a "systemic financial event." Also, "I take comfort in the much strengthened defenses of the banking system, financial intuitions in general, and financial regulators."

Mr Lockhart also said that so far, the US economy and financial system seems insulated against the ongoing upheaval in the Middle East.

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Fed hike should be slow, gradual: Evans
SEPTEMBER 30, 2014 12:00AM

Federal Reserve Bank of Chicago President Charles Evans said Monday the US central bank should be willing to let inflation modestly exceed the central bank's target, if that's what it takes to help to labour market heal.

"I am very uncomfortable with calls to raise our policy rate sooner than later," Mr Evans said. "I favour delaying lift-off until I am more certain that we have sufficient momentum in place toward our policy goals," he said.

"We should err on the side of patience in removing highly accommodative policy" Mr Evans said. "We should not shy away from policy prescriptions that generate forecasts of inflation that moderately overshoot our 2 per cent target for a limited time. Such a policy strategy more properly balances expected costs and benefits," the official said.

Mr Evans' comments came from the text of a speech prepared for deliver before a gathering of the National Association for Business Economics in Chicago. Mr Evans spoke in the wake of the recent Federal Open Market Committee meeting, where central bankers continued to say that interest rates will be held at near-zero levels for a "considerable time" to come.

Most Fed officials believe the central bank will be able to hold off on raising interest rates until sometime into 2015. Core officials have favuored lifting rates around mid-year. But at the same time, a number of central bankers have been arguing that very buoyant price levels in financial markets, coupled with a faster-than-expected recovery in the job market, favor the Fed considering rate hikes sooner rather than later. Dallas Fed President Richard Fisher said in a television interview Sunday he worries the Fed may be behind the curve when it comes to raising rates, and that the institution might be risking an unwelcome inflation flare-up at some point in the future.

Mr Evans countered those who are leaning toward earlier-than-expected rate increases by saying the underlying state of the job market still shows signs of softness. He said that at a central bank with a mandate to promote stable prices and maximum sustainable job growth, the balance currently tilts in favor of policy that supports job creation at a time when inflation has remained stubbornly weak.

"Although we have made great strides, a good deal of slack remains in the labour market," Mr Evans said. "I believe it is a bit premature to say that we are close to our full employment target - the labour market is not yet calling for business-as-usual monetary policy," the official said.

Mr Evans said in his speech he sees little threat of price pressures taking off in any chase, saying inflation remains "stubbornly low" at a time where "wage growth in general continues to be very modest."

Mr Evans said the biggest mistake the Fed could make right now is to raise interest rates too soon. He also said when the Fed does begin to raise rates, he believes those increases should be "shallow" so that officials can be sure the recovery will endure.

Mr Evans is not a voting member of the Fed board this year.

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US jobless claims fall to 287,000
AFP OCTOBER 03, 2014 12:00AM

The number of new applications for unemployment benefits fell again last week, the latest sign lay-offs are declining amid a generally improving economy.

Initial claims for unemployment benefits decreased by 8,000 to a seasonally adjusted 287,000 in the week ended September 27, the Labor Department said Thursday. That was below the 297,000 claims forecast by economists surveyed by The Wall Street Journal. Claims for the previous week were revised up by 2,000 to 295,000.

The four-week moving average for claims, which smooths out week-to-week volatility, fell 4,250 to 294,750. They've been hovering around 300,000 since late July, a level last seen regularly in 2007.

Thursday's report also showed the number of people continuing to draw unemployment benefits fell by 45,000 to 2.4 million for the week ended September 20. Those figures are reported with a one-week lag.

Companies aren't laying many people off these days because the economy is growing and post-recession payrolls remain lean. In addition, a growing number of the newly laid off are deciding to not file claims as they become more optimistic about their chances of quickly finding new jobs.

Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 4.6 per cent in the second quarter, rebounding strongly after a weather-driven contraction in the first quarter.

Hiring has also been picking up. Private-sector payrolls increased by 213,000 jobs in September, according to a Wednesday report from payroll processor Automatic Data Processing Inc. and forecasting firm Moody's Analytics. That was up from 202,000 in August.

Economists forecast the Labor Department's closely watched jobs report will show Friday that private and public sector employers added 215,000 jobs in September, bouncing back strongly after a modest 142,000 gain in August. In the prior six months, employers added 200,000 jobs or more each month for the first time since 1997.

But at 6.1 per cent in August, the nation's unemployment rate remains high by historical standards, and many economists believe the gauge overstates labour-market health. It doesn't capture, for example, people who've given up their job searches.

Federal Reserve officials last month reiterated their intention to keep interest rates at their current level near zero for a "considerable time" as the labour-market healing process continues.

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US factory orders fall by record 10.1%
AP OCTOBER 03, 2014 12:30AM

Orders to US factories fell in August by the largest amount on record, but the big drop was heavily influenced by a plunge in volatile aircraft orders.

A key category that tracks business investment plans posted a small increase, which was viewed as an encouraging indication that factory production will maintain momentum in the second half of this year.

The Commerce Department orders dropped 10.1 per cent in August after a record increase of 10.5 per cent in July. Both months were heavily influenced by swings in demand for commercial aircraft, which soared in July only to plummet in August.

Core capital goods, a category seen as a proxy for business investment, managed to rise a slight 0.4 per cent in August after a 0.1 per cent July dip.

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http://www.cnbc.com/id/102050278?trknav=...:topnews:8

The Federal Reserve is making a major shift in interest rate policy
Jeff Cox | @JeffCoxCNBCcom
8 Hours Ago
CNBC.com


The Federal Reserve may go from moving the goal posts to removing them altogether when it comes to setting interest rate expectations.

Those goal posts have come in the form of economic numbers—more specifically, 6 percent unemployment and 2 percent inflation—that, if hit, would trigger interest rate increases.

But many central bank watchers agree that the use of those targets—part of "forward guidance," in Fed parlance—is reaching an end. Chair Janet Yellen tipped her hand after the last Fed Open Market Committee meeting, and market participants believe the use of the unemployment and inflation targets is about to go away for good.

Instead, the Fed is likely now to rely increasingly on the more-nebulous "data dependent" terminology for when it will lift its target funds rate off the floor, and won't wed itself to the specific targets first delineated in 2012.

Janet Yellen
Andrew Harrer | Bloomberg | Getty Images
Janet Yellen
"The need for timely flexibility and data-dependent discretion would make the committee's lock step adherence to an obsolete forward guidance policy unwise," Bob Eisenbeis, chief monetary economist at Cumberland Advisors, said in an analysis posted on the SNL Financial site. "In effect, what we have seen is the rational abandonment of forward guidance as a useful policy tool in favor of discretion."
Read MoreDudley: 'I would love to' raise rates in 2015
For investors, the ramifications are a Fed that likely will be more flexible and able to retreat from its historically unprecedented level of cheap money at its discretion rather than being dictated to by arbitrary economic benchmarks.

The central bank has resisted raising rates even though unemployment has fallen below the original 6.5 percent target and as internal questions have been raised over whether risk assets like some areas of the stock market and high-yield bonds have become overpriced.
Read MoreJulian Robertson sees TWO bubbles brewing
Under the new approach, the Fed will not be dictated by a specific data set or two but rather by the larger economic picture.

Eisenbeis pointed specifically to the Fed back in March already dropping its specific unemployment rate target, replacing it instead with "maximum employment." He also cited statements from Yellen after the September meeting that interest rate decisions would be data-driven, as opposed to the "considerable time" language that intimated the central bank had a calendar date for when it would raise rates.

"In effect, she repudiated the 'considerable time' language in the statement, validating (Philadelphia Fed President Charles) Plosser's concern and effectively adopting his approach," he said. "The result is effectively to eviscerate meaningful forward guidance, since we now don't know how data-dependent the committee's views will be."

Yellen is "not going to be locked into some artificial number someone picked before her," said Jim Paulsen, chief market strategist at Wells Capital Management. "It was ridiculous to begin with, and it's good they do away with it."

Read MoreThe market's next Fed fear: The exit strategy
The move away from forward guidance appears to be a victory for Fed Vice Chair Stanley Fischer, who has sided with critics who believe the approach is dangerous and actually could lead to the central bank having communication problems if, as is the case now, the Fed doesn't follow through on raising rates once the targets have been hit.

Though they are otherwise close ideologically, adherence to forward guidance has been considered a key difference between Yellen and Fischer.

The balance of the FOMC joins them, though, in a generally dovish approach to interest rates that will only be exacerbated in 2015 when Dallas Fed President Richard Fisher and Plosser leave the Fed. Both are reliably hawkish, but their exits give President Barack Obama an opportunity to appoint yet another Fed official in favor of keeping rates lower for longer.

Removing forward guidance as an essential policy tool effectively gives the Fed more room to stay dovish regardless of what headline employment and inflation figures say.

Read MoreBacon Cheeseburger Index: The real inflation gauge
"Before Obama gets done here you could have one of the most dovish Feds there's been in a long time," Paulsen said.

Investors will get a better look at the central bank's thinking after the October meeting, when the FOMC is expected to end the monthly bond-buying program but keep rates anchored.

"It will be interesting to see whether the FOMC's new communications task force addresses the forward guidance issue head on or whether it devises instead a strategy that pretends that forward guidance is still in play," Eisenbeis said. "Nevertheless, for those rational policymakers who value discretion, forward guidance is dead!"

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US jobless rate drops to 6-year low in September
DOW JONES NEWSWIRES OCTOBER 04, 2014 1:30AM

US job growth rebounded in September and the jobless rate slipped below 6 per cent, suggesting the labor market is improving faster than previously thought and raising the prospect of an earlier-than-anticipated move by the Federal Reserve to raise interest rates.

Non-farm payrolls grew a seasonally adjusted 248,000 last month, the fastest pace since June, the Labor Department said Friday. Revisions showed stronger job growth in prior months than previously estimated. The economy added 180,000 jobs in August instead of the initially reported 142,000. It created 243,000 in July, up from an earlier estimate of 212,000.

The unemployment rate, obtained from a separate survey of households, fell to 5.9 per cent last month from 6.1 per cent in August, hitting the lowest level since July 2008.

Friday's report suggested the labor market resumed the steady growth it posted in late spring and early summer after hitting a soft patch in August.

The figures are sure to weigh on Fed officials as they assess when the economy will be healthy enough to raise short-term interest rates. The Fed has kept its rate target pinned near zero since the recession to stimulate growth.

Unemployment, nearly five years after peaking at 10 per cent, is approaching the 5.2 per cent-to-5.5 per cent range the Fed considers full employment. September's jobless rate is where officials projected it would be at the end of 2014.

Stronger job growth "continues to paint a picture of slack in the economy diminishing faster than the Fed has been expecting," economist John Ryding of RDQ Economics said in a note to clients. Referring to the Federal Open Market Committee, he said, "the need to hike rates sooner than the FOMC has been guiding is becoming clearer."

Many Fed officials have been considering a first rate increase in mid-2015. Fed Chairwoman Janet Yellen has said the central bank may move sooner than anticipated if the labor market improves faster than the Fed projected. The central bank is set to hold its next policy meeting October 28-29.

Over the past three months, the economy added an average of 224,000 jobs, roughly in line with the average of 228,000 in the first six months of the year.

Stronger job creation has lifted hopes the economy will emerge from the subpar 2 per cent growth pace of recent years and into a stronger phase. There are early signs of that happening.

Gross domestic product--the broadest measure of US output--grew at a 4.6 per cent annual rate in the second quarter, matching the fastest pace of the recovery. That partly reflected a rebound from a winter contraction. But many economists expect GDP growth to clock in near 3 per cent in the third quarter, suggesting sustained momentum.

Despite the latest improvement, the report indicated slack remains in the labor market and pointed to persistent problems facing the world's largest economy. The share of Americans in the labor force fell again last month, hitting the lowest level in more than three decades. The labor-force participation rate fell to 62.7 per cent from August's 62.8 per cent. Before the recession, the rate stood at 66 per cent.

Workers' wages remained stagnant. Average hourly earnings for private-sector workers fell a penny to $US24.53. Earnings were up 2 per cent compared with a year earlier, far slower than the gains seen before the recession.

More than five years after the recession, nearly 9.3 million workers were still searching for jobs in September. And 7.1 million were stuck in part-time jobs because they couldn't find full-time work.

A broader measure of unemployment, which includes involuntary part-time workers and Americans too discouraged to apply for jobs, fell by two-tenths of a percentage point to 11.8 per cent in September, the lowest level since October 2008. During the last decade's expansion it hovered between 8 per cent and 10 per cent.

Last month's job growth came from a range of industries. Construction jobs increased 16,000 from August. Retailers added 35,000 jobs. Professional and business services climbed 81,000. Health care gained 23,000 positions. The manufacturing sector changed little.

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THE FED
Fed's Tarullo: FOMC will weigh global risks in policymaking
11 Hours Ago
Reuters

Federal Reserve Board Governor Daniel Tarullo.
Downside risks to the global economy are a factor the Federal Reserve will have to consider even as the U.S. economy recovers from the 2007-2009 financial crisis, Fed Governor Daniel Tarullo said on Saturday.

Tarullo, a voting member of the Fed's policymaking committee, also said the U.S. economy is facing deep problems from decaying infrastructure to a polarized income distribution that could weaken demand in the future.

"I am worried about growth around the world, there are more downside risks than upside risks," Tarullo said at a conference of the Institute of International Finance in Washington.

Read MoreFed's Plosser not too concerned about below-target inflation

"Other major economies are tilting or at least showing risks that are a little bit more to the downside than to the upside and this is obviously something we have to think about in our own policies," he said.

The Fed is expected to begin raising interest rates sometime next year. Many Fed officials have indicated they do not want to begin raising rates until it is clear the U.S. recovery is sustainable and can withstand a policy tightening.

That has become less certain in recent weeks as concern has mounted over Europe's potential to slip back into recession, and recognition that investment, household spending and other elements of aggregate demand globally have lagged.

Tarullo said U.S. regulators were still determining the full fallout from the financial crisis and Great Recession, but he added it had become clear the United States "is going to have to address some pretty fundamental problems."

"An aggregate demand problem is not unrelated to income distribution ... Right now the physical capital stock (of the country) is about as old as it has been in the post World War Two era ... That suggests an underinvestment," he said.

"This is not a quick turnaround," Tarullo said.

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ANZ chief Mike Smith optimistic on end of US stimulus program
THE AUSTRALIAN OCTOBER 13, 2014 12:00AM

Michael Bennet

Reporter
Sydney

ANZ chief executive Mike Smith is confident the “return to normality” with the end of the massive US stimulus program will push cash sloshing around institutional markets into “real” economies and that businesses can withstand rising interest rates.

But just weeks ahead of ANZ’s annual profit result, he warned that the banking sector’s revenue growth would be “much lower” than before the global financial crisis and markets would remain on edge until there was clarity on when the US will raise official interest rates.

He added that while history would probably view the experiment of “quantitative easing” favourably for the resurgent US economy, “the country that gets out of it last will actually struggle with the concept and that is likely to be Europe”.

In an exclusive interview with The Australia Business Review, Mr Smith revealed he had a “couple more years” in him as CEO and weighed into Apple’s entrance into payments, saying margins were already small and tech companies wanted to work with banks rather than replace them.

Mr Smith also indicated the bank would generate 25-30 per cent of earnings from Asia before the original target of 2017, an ambition put in place when he launched ANZ’s “super regional” strategy in 2007.

Amid rising volatility and slumping stockmarkets, Mr Smith said he was “not too worried” about the US Federal Reserve ending its third round of “quantitative easing”, or QE3, which has pumped $US85 billion into markets each month.

ANZ has suffered as the “wall of liquidity” and low official interest rates depressed margins from institutional banking. More recently, its Asia business has been clouded with uncertainty that capital could flow out of emerging markets to the improving US economy.

But Mr Smith, a seasoned banker in Asia, said the fallout from the Fed turning off the liquidity tap would be mitigated by Japan continuing to pump out cash and Europe potentially beginning quantitative easing soon.

“QE is one issue, but frankly it should be good for the banks in the longer term because really this is a return to normality as money actually goes into the real economy, rather than just equity and debt markets, which I think is positive,” he said.

“At the end of the day, banks are just a play on the economies in which you operate. Therefore if the economies are doing OK, banks should do OK.

“I think the issue will really be interest rates and to me it’s the question of when will interest rates start to rise.”

Bank shares are down about 8.5 per cent in the past month as investors bet that rising US rates will push up bond yields and drive down the Australian dollar.

But Mr Smith disputed that rising interest rates would be detrimental for the banks by stalling credit growth. Macquarie analysts this month warned that banks typically underperform the stockmarket as cash rates rise.

“Credit growth has in many ways been very slow because of confidence and actually rates are still at historically very low levels and therefore there could be a fair amount of increase until it starts to hurt businesses,” he said.

“What is perhaps more what we need to adjust to is the fact that revenue growth is going to be much lower than we used to expect pre-crisis.”

Bank stocks have been sold amid warnings from analysts that the financial system inquiry headed by former Commonwealth Bank chief David Murray may recommend the big four banks ­increase top-tier capital levels by at least $25bn.

Mr Smith and other senior bankers have in recent weeks met with Mr Murray to reinforce their argument that the banks do not need higher capital levels to protect against failures and the systemic risks from their massive exposure to mortgages. He added that the G20 next month in Brisbane would not finalise how to tackle risks from “too big to fail” banks, saying it was extremely complicated and would take time.

“I think capital has been seen as the answer to all the issues. Quite clearly it isn’t, there’s very many other issues to this,” Mr Smith said.

“I don’t think David is the problem. David understands this stuff pretty well. I think it’s really what the analysts have taken out of some of the comments, which they’ve extrapolated a series of fictitious assumptions. That has created its own storm.”

The inquiry is also examining the rapid technological changes reshaping the financial services industry, most recently shaken by Apple’s release of “Apple Pay” to enable contactless purchases on iPhones.

In a first, Apple in the US negotiated a slice of the “interchange fee” on transactions historically shared by banks and credit card issuers. Mr Smith said Apple’s entrance was “inevitable” due to Australians’ rapid uptake of contactless purchases.

“I think the difficulty for Apple is of course the interchange in Australia is very, very tiny compared to the US, so therefore there isn’t such a big commercial benefit for them.

“At the moment they do need the banks. I don’t see it as a massive income loss.”

On succession, he said he still had the energy to remain CEO, despite ANZ being likely to hit his earnings target from Asia before the 2017 target.

“I’m pretty comfortable at the moment. I’ll be here for as long as the board want me. There will come a time when I think a fresh pair of eyes will be useful, but I think I’ve got a couple more years in me yet.”

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Debt, regret and German fiscal rectitude
THE AUSTRALIAN OCTOBER 14, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney

AS Europe veers towards a feared deflationary spiral the European Central Bank is under growing pressure to follow the Fed’s footsteps and start a quantitative easing program, but it will face covert opposition from Europe’s biggest economy.

Germany has been uncomfortable with the sort of money creation programs Britain, the US and Japan have pursued since the financial crisis. As annual inflation in the eurozone fell to 0.3 per cent in September, ECB president Mario Draghi announced a new asset-buying program but stopped short of buying government bonds.

“It’s about losing your savings; that was the experience of Germans who twice lost their savings after the two world wars,” says Dr Christoph Muller, German Ambassador to Australia, in relation to the Germans’ aversion to the unconventional monetary policy embraced in the US.

“A kind of collective memory of the pain of that is still there, and flowing from that, a pre­occupation with the spectre of ­inflation.”

Many Germans, especially the middle and working classes who traditionally saved through bank deposits, lost their savings in the hyperinflation of 1923 and the currency reform of 1948.

The Australiansat down with the German Ambassador in advance of German Chancellor Angela Merkel’s state visit to Australia next month after the G20 meetings conclude in Brisbane. She will be the first German leader to visit since Helmut Kohl in 1997 (no French president has ever visited).

“Today the issue of losing savings comes up in a different way; people are talking about silent indirect expropriation,” he says, echoing a growing chorus of complaint, including one from the Bank for International Settlements in Switzerland that holding interest rates artificially low is fuelling business mal-investment, punishing savers, and laying the groundwork for a bigger crisis down the track.

“In the era of practically zero interest rates, the ordinary German saver is desperately searching for possibilities to keep his or her savings from slowly eroding.

“The average person — who doesn’t have the insight into the workings of the financial markets or doesn’t have the ability for serious risk assessment — shies away from the stockmarket, so they miss out on the possibilities there.”

If Australia owes its decade-long growth spurt to luck, Germany owes its to policy diligence.

Divided and destroyed after World War II, the country rode the post-War wave of industrial boom along with the rest of ­Europe. But since the global financial crisis it has surged ahead. Painful labour market reforms and a hard-nosed attitude to public finances are paying dividends as much as global demand for cars, heavy machinery and pharmaceuticals.

“I keep reading about two weaknesses of the Australian economy: lopsided emphasis on mining and not being sufficiently integrated into global value chains: as for the latter, it’s a specialty of German businesses to do just that,” he says.

“BASF, for instance, has their global R&D Centre for resources sciences and mining in Perth, for chemicals to be used in the mining sector, co-operating there with CSIRO,” he adds.

Muller naturally stresses the growing importance of Germany’s relationship with Australia. Unusually among rich advanced allies, the German government plans to set up a new embassy in Canberra’s leafy Yarralumla.

“Australians have a total of some $56 billion of investments in Germany (more than double the reciprocal holdings), a lot of it portfolio investment by Australian super funds looking for solid investment possibilities in German blue chips,” he says.

He is keen to highlight German submarine manufacturers’ keenness to bid for a mooted contract to build Australia’s next generation of submarines. But it is German’s global economic prowess that inspires. A country of 81 million people, Germany has quietly become the world’s second-largest exporter behind China (1.4 billion people) and roughly equal to the US (310 million). China is Australia’s biggest customer, spending $95bn last year, mainly on commodities. China is only Germany’s fifth-biggest customer (France and the US are first and second) yet over the same period it bought $97bn worth of goods and services from Germany.

“It is industrial products, not only cars — indeed Volkswagen had already set up an assembly plant in Shanghai when I served in China 25 years ago. Much of the machinery that helps China to be the world’s factory floor comes from Germany,” says Muller.

Germany’s jobs market is a testament to the power of basic, if unpopular, labour economics. By 2005 Germany’s unemployment rate had peaked at 11.2 per cent.

“We got into a vicious circle of economic stagnation and rising unemployment, Germany being regarded as the sick man of Europe,” he says, crediting former chancellor Gerhard Schroeder’s Agenda 2010 labour market reforms with prompting an enduring economic revival.

From 2003, labour market regulations were cut significantly. “Before, companies had been hesitating to hire new people because they were concerned about not being able to dismiss workers in case of need,” he says, referring to the famously generous labour market laws that underpin structurally high jobless rates in France, Spain and Italy.

Since then, Germany’s unemployment rate has fallen to 5.4 per cent while France’s has crept up to about 10 per cent. The enhanced job market flexibility kept Germany’s unemployment rate low through the GFC.

“Companies felt encouraged to make new investments and suddenly the economy started to grow again and, at the same time, the government’s need to pile up more debt was reduced,” he says, suggesting the sorts of painful structural reforms Germany made might wisely be introduced in other European countries.

Muller isn’t worried a new minimum wage of €8.50 ($12.30) an hour from January next year will reverse the success. “We have been encouraged persistently by our European neighbours to do a bit more to increase domestic demand in Germany; we are thinking about the minimum wage also in those terms,” he says.

In the wake of reunification in 1990 the new federal government oversaw massive transfers to help rebuild the former East Germany. Part of the country’s significant debt burden — almost 80 per cent of GDP — lingers from that era. But it has maintained one of the strictest fiscal policies in Europe for a decade, and despite weakening economic growth, is expecting a surplus next year — Canberra isn’t expecting a surplus until 2018 at the earliest.

Asked about Germany’s approached to budgets, Muller begins reading Tony Abbott’s controversial speech to world leaders in Davos, Switzerland earlier this year — a speech that left-wing pundits here condemned for its supposed simplicity. “No country has ever taxed or subsidised its way to prosperity; you don’t address debt and deficit with yet more debt and deficit,” the Prime Minister said. “We share those thoughts,” Muller says.

Germany’s federation of 16 states periodically throws up similar problems to Australia’s: “Our fiscal equalisation mechanism helped Bavaria a lot in the 1950s and 1960s when it was still mostly agrarian, but today Bavaria is complaining about having to subsidise those ‘irresponsible, socialist-run’, poorer states in Germany,” he says.

The jury is still out on Germany’s latest experiment though — the Germans even have a name for it, energiewende — which is less than textbook orthodoxy. The nuclear meltdown in Fukushima in 2011 galvanised longstanding opposition in Germany to nuclear energy and the government announced it would shut down the country’s reactors by 2022. Renewable energy is meant to make up 80 per cent of electricity production by then.

“Germany has some of the best nuclear engineers in the world and maybe the best nuclear safety technology. But it’s a moot point: we live in a democracy and it’s just not possible any more — so it’s gone,” says Muller.

On the back of heavy subsidies the solar, wind and hydro renewables make up 30 per cent of electricity generation (13 per cent in Australia). “The solar subsidy has had interesting results, probably helping the take-off of the Chinese solar panel industry, because they sold in large quantities to the heavily subsidised German market. That in turn has helped to bring down, through mass production, the cost of solar panels worldwide,” he says.