Australian Economic News

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Worst competition ranking in 18 years

Jacob Greber Economics correspondent
528 words
28 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Australia's global competitiveness has slumped to the worst ranking in at least 18 years, slipping behind New Zealand, as business criticised the Abbott government's failure to kick-start a fresh wave of infrastructure spending.

In a damning report done for the Switzerland-based IMD World Competitiveness Yearbook, the nation's ranking slipped to 18 from 17 a year ago. The deterioration continues a six-year slide that started in 2009, when Australia was ranked five.

For the first time in 18 years, New Zealand has jumped ahead of Australia, moving to 17 from 20, the IMD report shows. Among the biggest concerns raised by Australian businesses surveyed for the IMD rankings by the Committee for Economic Development of Australia are the fresh declines in investment in skills and leading-edge technology, and a lack of new spending on transport and other infrastructure.

The findings are a major blow for Tony Abbott, who vowed upon being elected in 2013 to become the "infrastructure prime minister". They also highlight ongoing dismay within the business community at the lack of movement on major new projects.

With the government using this month's budget to borrow more to pay for a short-term boost through the $20,000 instant asset write-off for small business, concerns continue to grow at the lack of longer-term economic investment to replace the resources boom.

"For Christ's sake, something has to happen - the economy is not ticking over, interest rates and budget deficits are not at they level they are because things are doing well," said CEDA chief executive Stephen Martin.

Professor Martin said the government had failed to live up to its rhetoric on infrastructure and that it was time to recognise Victorians had provided a "screaming mandate" for what was a viable alternative to Mr Abbott's preferred East West Link freeway in Melbourne.

"The most critical thing is that we just don't have any movement on any major infrastructure projects," Professor Martin told The Australian Financial Review. "The money for [Sydney's] Westconnex was announced by the Gillard government - there's been nothing else since.

"This is one of the things people responded to in the survey - there doesn't seem to be an infrastructure prime minister."

The findings come less than a week after Infrastructure Australia, the government's main infrastructure advisory body, warned that the national cost to the economy of road congestion would quadruple by 2031 to $53 billion.

According to the IMD report, published on Thursday, Australia's ranking on infrastructure has worsened to 19th this year from 18th in 2014, and 14th in 2011.

Economic performance has also dipped, to 28th from 24th last year, while the efficiency of government has deteriorated to 14 from nine because of the worsening budget deficit and rising government debt.

IMD's latest ranking of 61 countries across more than 300 criteria also shows a sharp slide in international investment (to 39 from 53).

Key pointsAustralia's has slipped in

the IMD World Competitiveness Yearbook.

The fall continues a six-year slide that started in 2009.


Fairfax Media Management Pty Limited

Document AFNR000020150527eb5s00008

[changwk]

Prominent 'bear' Gerard Minack is one analyst warning of a recession as Australia ends a once in a century boom.

Mr Minack is warning that it could happen in the next couple of years as mining construction keeps dropping off, the housing boom cools and the auto industry shuts down.

He spoke with The Business and explained what other factors make him think that Australia is a good chance of posting at least two consecutive quarters of economic contraction.

ELYSSE MORGAN: A few months ago you said Australia had up to a one in three chance of sliding in to recession over the next 18 months.

Do you still think that's the case?

GERARD MINACK: Probably not. On a three or six month view.

The one indicator I'm watching I think, stands head and shoulders above everything else, is employment.

The underlining fundamentals remain weak but, to tip us over the edge from this sort of low growth phase we've been in for 18 months, you really need job losses.

ELYSSE MORGAN: What's going to support or not support employment?

GERARD MINACK: Well the big issue for employment, going forward and looking to 2017, is firstly the capex decline is going to accelerate.

We know that from ABS (Australian Bureau of Statistics) data, but we've known that for a long time just looking at the schedule of big projects.

Secondly we've got the car industry shutting down. That risk that would occur this year's been postponed by some Government hand outs.

Thirdly, it's not clear to me that the residential sector, that's clearly been an important contributor to employment this year, will be able to sustain that growth into next year.

And on the other hand, we can't see the offsets coming through yet.

ELYSSE MORGAN: So you talk of recession but what are the actual chances of that happening over the next couple of years?

GERARD MINACK: I'd actually be quite surprised if we avoided recession given the size of the adjustment we have to go through over the next three or four years.

Australia's not ending a once in a generation boom. It's ending a once in a century boom.

And the two real facets of that were firstly, the rise in the terms of trade now they are already well off their peak and we're heading back towards more normal levels.

The second part of it that, in an historical context was even more unprecedented, was the boom in mining-related capex.

Historically, since World War Two, that's averaged about two [percentage] points of GDP (Gross Domestic Product), in this cycle it got to over seven points and we're only just starting the decline now.

So we will be exceptionally vulnerable for the next three, four years as we normalise these measures.

I think it will not take much of a shock to tip us over.

ELYSSE MORGAN: The Treasurer has said people who are talking recessions are clowns. What do you make of that?

GERARD MINACK: Well, I mean, he would say that wouldn't he. And that's not to have a shot at Mr Hockey.

It's just to say I can't think of a treasurer in my entire career of 30 years, that's sort of stood up and said, "Yes there is a real risk of recession."

I mean policy makers just don't do that.

But the bigger issue is when you look at say the GDP data we had this week- he can focus on the 0.9 [per cent quarterly growth] and say that looks fairly good, but you've got to appreciate just how misleading GDP is in this cycle, and how misleading it was in the boom.

The boom and the threat of a bust is all about the terms of trade. And real GDP at the moment is very low calorie growth.

Yes it's driven by mining export volumes but the price of the stuff is falling. So export receipts are actually declining. So it's making no contribution to income.

In addition employment - it hires no, almost, no one. In fact they're firing at the moment so we're not getting any income boosts from it, we're not getting any jobs growth from it.

Statistically it adds to real GDP, but it's just not the metric to focus on and, the metric to focus on is domestic income. That remains exceptionally weak and that keeps alive the risk of recession.

ELYSSE MORGAN: Looking at rates on a domestic front, do you think the Reserve Bank has done the right thing by cutting to 2 per cent? And do you think they'll cut again?

GERARD MINACK: Well I guess the problem from the bank's point of view is they have a mandate, they have a lever. And they've had to pull the one lever they felt comfortable using.

Now it would have been helpful for other policy measures to have been deployed including fiscal policy.

Would also have been helpful to introduce some of the macro-prudential measures that are now being discussed, four or five years ago.

ELYSSE MORGAN: Do you think there's a housing bubble?

GERARD MINACK: I think housing's a huge macro risk.

When we have one of the most levered households in the world with clearly one of the most expensive housing stocks and what we have seen persistently through the last two decades is where you have seen job losses and of course they've only been localised because we haven't had a recession in 25 years.

But where you've seen job losses, you've seen double digit house price declines so if we get job losses across the economy I'd be staggered if we didn't see double digit house price declines.

And all the tensions and stress that that would create and what have we achieved by letting house prices get this high? Nothing!

ELYSSE MORGAN: Extremely loose monetary policy around the world has distorted asset prices. Equities, bonds et cetera.

How bad will the fallout be for Australia when there is a move namely by the Fed to normalise that policy?

GERARD MINACK: Low rates, I would argue have not been particularly effective on the real economy but they've had their usual potent impact on the financial economy.

Financial smartypants have taken low rates and run with it aggressively.

So as we start to withdraw that I think the areas of real risk are firstly, some credit markets. I think equities, we may see some turbulence in bond markets but my view is bond yields are not abnormally low because of central bank quantitative easing.

They are at the new low normal and that reflects the fact that we just had a world of excess saving.

ELYSSE MORGAN: Gerard Minack, thanks very much for your time.

GERARD MINACK: You're welcome Elysse.

http://www.abc.net.au/news/2015-06-08/an...on/6529212

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RBA open to more rate cuts
DOW JONES NEWSWIRES JUNE 10, 2015 5:15PM

Australia's central bank Governor Glenn Stevens said Wednesday that he remained open to lowering interest rates further as the outlook for economic growth remains soft, but warned that the benefits of doing so may be limited and that it could even be risky.

"We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth," he told a meeting of economists in Brisbane.

Mr Stevens said the areas of the economy that low interest rates can support are already performing solidly, adding that more stimulus has to come from government and business to lift economic growth.

"The bigger point is that monetary policy alone can't deliver everything we need and expecting too much from it can lead, in time, to much bigger problems," Mr Stevens said.

With household debt already high in Australia, the potential for lower interest rates to spark the economy through more spending would appear limited, Mr Stevens said.

PICKERING: the RBA can't do all the heavy lifting

"It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels. I think everyone can see that," he added.

Mr. Stevens' comments come after the Treasury Secretary John Fraser, who sits on the interest-rate-setting board of the Reserve Bank of Australia, said Sydney house prices were overheating as a result of record-low interest rates.

Australian policy makers are caught in the bind of a stubbornly weak economy as mining investment falls sharply and plunging commodity prices savage growth. The RBA has lowered interest rates to record lows in response, inviting in a worrisome house-price surge in the major capitals of Sydney and Melbourne.

Mr Stevens called for less reliance on monetary policy to support growth, saying government infrastructure spending and stronger investment by business would be helpful.

"It really is very important that other policies coalesce around a narrative for growth," he said. "Recent growth in the economy has not been as strong as we want."

Mr. Stevens supported Treasurer Joe Hockey's fiscal strategy outlined in the government's 2015-16 budget announced in May, where stimulus was directed to small businesses, amid assurances the process of budget-deficit repair would continue over time.

"I think the government is on the right track in not seeking to compensate for lower revenue growth by cutting spending further in the short run," he said. More infrastructure spending would be "confidence enhancing," he added.

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Unemployment rate drops to 6pc
MICHAEL RODDAN BUSINESS SPECTATOR JUNE 11, 2015 1:18PM

The AUD rollercoaster ride rolls on
The Australian unemployment rate has dropped to a new 12-month low of 6 per cent, seasonally adjusted, in May from 6.1 per cent.

Analysts surveyed by Bloomberg had forecast the unemployment rate to hold steady at 6.2 per cent in May, but with 15,000 new jobs expected to have been added to the economy.

The Australian dollar jumped sharply in value following the surprise number while the Australian stockmarket dropped as the chances of a further interest rate cut diminished.

The Australian Bureau of Statistics said the total number of people employed in Australia increased by 42,000 to 11.760 million in the month, on a seasonally adjusted basis.

The jobless rate is now well below January’s 12-year high figure of 6.4 per cent, but has been above 6 per cent for 12 consecutive months since June last year.

CommSec economist Savanth Sebastian said the figures surpassed even his “rather optimistic” expectations.

“Over the past seven months almost 200,000 jobs have been created. Jobs are being created, more hours are being worked by existing workers, and more people are finding work,” he said.

The participation rate, which shows the proportion of the population that have a job, are looking for work or are ready to start working, held steady during the month, after it was downwardly revised for April, to 64.7 per cent.

The number of unemployed people shrunk in May, in seasonally adjusted terms, by 22,000, to a total of 745,200 people.

The ABS said the increase in employment was driven by the number of females in part-time work, up by 29,800, and by males in full-time employment, which increased by 15,900.

The number of people who were looking for full-time work in May decreased by 23,500 people in the month.

However, the aggregate monthly hours worked lifted in May, although only slightly, by 0.1 per cent.

The Australian dollar rose to US77.93c by 11:32am, from US77.23c just before the jobs numbers were released.

With AAP

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Woolworths boss says high home prices are good for retailers
THE AUSTRALIAN JUNE 12, 2015 12:00AM


Senior Business Reporter
Melbourne
Housing boom boosts retailers

Woolworths boss Grant O’Brien has waded into the housing ­affordability debate, labelling it an “understandable distraction” but saying that people diverting as much disposable income as ­possible into saving for a deposit or paying down mortgages on ­increasingly pricey homes had not translated to lower sales.

Mr O’Brien went further to argue that the talk about soaring housing values, especially in Sydney, Melbourne and other parts of the country, was feeding into positive consumer confidence that, along with low interest rates and sliding unemployment, was good for retailers.

Responding to yesterday’s report in The Australian that German supermarket group Lidl could be considering entering Australia’s $90 billion grocery sector after applying for a portfolio of new grocery trademarks, Mr O’Brien said the chain was a “terrific retailer” but that Woolworths would use its broader full-line supermarket offer, national supply chain and 900-strong store network to fend off any competition for shoppers.

“We are (also) Australia’s leading online retailer, so they are pretty big pieces of advantage that we would look to leverage in this competitive marketplace, Lidl, Aldi or whoever it happens to be,” he said.

“We are maybe 12 years into Aldi being in Australia and they have more than 300 stores on the ground that has taken them more than a decade to build scale. It will take anyone who comes here a ­period of time to build scale.”

Speaking after a retail panel discussion held by the Australian National Retailers Association, which yesterday rebranded itself as the Retail Council, Mr O’Brien said that, outside of the housing ­debate, the key economic indicators such as mortgage rates and employment remained highly supportive of continued consumer confidence and spending.

“And we also know that household savings are still quite high, so from a consumer confidence point of view all of the settings are right and I don’t think, from my point of view, the debate around housing bubbles or anything like that is at a stage yet where it is making people stop and think what they are going to buy in the stores,” Mr O’Brien said.

“And people talking about the value of their homes, to my previous point, is how people get confident so they are seeing rising values and the debate has just broken out whether or not it’s sustainable or not.

“I don’t think that has had an immediate effect, or will have an immediate effect, on people’s spending habits.”

Mr O’Brien has stepped down as the chairman of the Retail Council after one year at the helm as he focuses on his new strategy to revive sales and earnings at Woolworths, with incoming chairman Peter Birtles, the chief executive of Super Retail Group, saying yesterday housing affordability was a concern to retailers and their staff.

“Clearly, retail as an industry employs a lot of people that are at the lower end (salary) and that’s an issue for a lot of our employees so as an industry we are very focused on that, and my view is the country needs to address the issue particularly in markets like Sydney where it is a challenge.”

During the panel discussion, which included Mr O’Brien, David Jones boss Iain Nairn, Best & Less boss Holly Kramer and the boss of Dymocks, Steve Cox, the retailers called for a liberalisation of trading hours so bricks and mortar stores could compete with online players that were open around the clock and didn’t close on public holidays or weekends.

David Jones’ Mr Nairn admitted that under its previous owners the upmarket department store had come late to the online party, making a significant push on the web only three years ago.

He said David Jones had total stock inventory of $600m but that its warehouse for online transactions could at this stage hold only a maximum of $40m worth of clothing and apparel stock.

Ms Kramer said Best & Less had to date focused heavily on ­female shoppers that made up the majority of its customers and was now turning its attention to improving its menswear range.

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http://www.smh.com.au/federal-politics/p...610-ghkpgn

Reserve Bank governor Glenn Stevens flags further interest rate cut and calls for stimulus
Date
June 11, 2015

Mark Kenny



Reserve Bank Governor Glenn Stevens has called for the government to consider going further into deficit to fund new infrastructure construction as he contradicted Joe Hockey on the housing affordability and economic debate, describing runaway house prices as "crazy".

One month after its second budget (sold as the best budget ever for small business), soaring house prices, stubbornly flat wages growth, high unemployment and declining consumer confidence are adding to pressure for the government to do more to bolster the economy by directly financing roads, rail, and port construction, even if it makes the deficit worse.

<i>Illustration: Ron Tandberg</i>
Illustration: Ron Tandberg
Mr Stevens, who on Wednesday branded high prices being paid in the Sydney housing market in particular as "crazy", has revealed the threats to national growth are now so numerous that the central bank remains "open to the possibility of further [monetary] policy easing, if that is on balance, beneficial for sustainable growth".

But he made clear the Reserve, which has already slashed the cash rate to a record low 2 per cent, is running out of leverage itself and would prefer to see stimulus spending by the government, saying there is nothing wrong with borrowing to build public assets.

He described it as "very important" that policies other than interest rates "coalesce around a narrative for growth".

Glenn Stevens speaks at an economic conference in Brisbane on Wednesday.
Glenn Stevens speaks at an economic conference in Brisbane on Wednesday. Photo: Glenn Hunt
"As things stand, the economy could do with some more demand growth over the next couple of years," he told a Brisbane Economic Society lunch.

That could see Canberra going further into debt in the short term, with the ordinarily conservative governor noting pointedly, "it is perfectly sensible for some public debt to be used to fund infrastructure that will earn a return – that is not the same as borrowing to pay pensions or public servants".

However, in a nod to the bitterly polarised political debate about debt and deficit in Australia in recent years, he called on the political community to agree on a common "story" in favour of infrastructure spending to help build confidence and to "unleash large potential benefits that at present are not available because of congestion in our transportation networks".

Adding to Joe Hockey's woes, the monthly Westpac-Melbourne Institute consumer confidence index fell by 6.9 per cent in June.
Adding to Joe Hockey's woes, the monthly Westpac-Melbourne Institute consumer confidence index fell by 6.9 per cent in June.
"Infrastructure spending has a role to play in sustaining growth and also in generating confidence ... it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product.

"The impediments to this outcome are not financial."

The call for debt-financed public expenditure on economic upgrades came as Mr Abbott was forced to defend his embattled Treasurer, Joe Hockey, who had played down the harmful effects of overheating Sydney and Melbourne property markets, arguing they are functioning properly because houses were being bought and sold, and that first home buyers were only locked out if they did not have well paid and secure jobs.

While Liberals mostly rallied around Mr Hockey, arguing his observations were simply statements of fact, voters on social media sites and talkback radio responded less favourably, with many claiming to be insulted by the suggestion of moving into higher paid jobs.

Adding to Mr Hockey's woes, the monthly Westpac-Melbourne Institute consumer confidence index fell by a sizeable 6.9 per cent in June, to be once again below the 100-point mark where optimists and pessimists are equally numbered.

At 95.3 per cent, the index suggests consumers were relieved rather than impressed when Mr Hockey's second budget avoided the harsh cuts of his first budget in 2014, but that the 2015 blueprint has done nothing to improve sentiment and get people spending again.

Speaking in western Sydney, where house prices have risen steeply in recent years, Mr Abbott refused to be drawn on whether Mr Hockey has been insensitive to suggest that people needed adequate incomes to buy into the market.

Asked if teachers and nurses were being encouraged to change jobs or accept life as renters, Mr Abbott went for empathy, saying he had "felt a bit of mortgage stress" himself over the years.

"Even as a cabinet minister sometimes it's hard to pay a Sydney mortgage and I know that over the years I've earned a lot more than the average person," he said.

"So, the Abbott family certainly understands what it's like to have a mortgage. We still have a mortgage. We still have a mortgage – like so many Australians. I've got three daughters, all of whom at some point soon either are getting into the housing market or are looking to get into the housing market," he said.

"This is a treasurer who is striving every day to do the right thing by the people of Australia."

However, one of Mr Hockey's own colleagues conceded that the Treasurer's comments were at the very least "unwise" and that Mr Hockey had "done his dash" with voters.

The MP said expectations of Mr Hockey were now low and said he would probably be replaced at or before the next election to improve the government's key economic messaging.

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Political dysfunction is taking its toll on our infrastructure
THE AUSTRALIAN JUNE 19, 2015 2:35PM

Alan Kohler

Business Spectator editor in chief
Melbourne

Two road header tunnelling machines building the underground tunnel link between the North West Rail Link tunnels and the Epping to Chatswood railway tunnels. Source: Supplied

One side-effect of the Sydney property boom could be a boom in tunnelling. We can only hope.

It’s hard to be precise, but the “crazy” price of land on the earth’s surface, at least in Sydney, appears to have finally gone above the falling cost of digging tunnels underneath it, thanks to improvements in tunnelling technology as well as the land price boom.

Australia’s lack of urban subway networks is arguably the nation’s biggest, most problematic, infrastructure failing.

Most of the transport challenges in Melbourne and Sydney have to do with compensating for the absence of adequate underground public transport, apart from a single loop in each city.

As the Governor of New York, Andrew Cuomo, said: “What made Manhattan Manhattan was the underground infrastructure, that engineering marvel.”

Start of sidebar. Skip to end of sidebar.

MOREInvestors await toll road costs
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The same goes for London and Paris, not to mention Shanghai, Beijing, Budapest, Stockholm, and Minsk. In fact it’s hard to think of a city of any size without a subway, except in Australia.

The reason, in history, is the sense that Australia’s wide-open spaces and cheap land meant there was no need to dig under the surface for transport. When other cities were tunnelling subways throughout the 20th century, driven by the high cost of land, Sydney and Melbourne were sticking to the surface.

In Melbourne they even — absurdly — put the railways (trams) in the middle of the roads, presumably thinking there would never be very many cars. Now both the cars and the trams spend much of there time stationary. Sydney’s roads are clogged by buses.

The result of Australian public transport being mostly on the surface is that our major cities are now grinding to a halt.

Infrastructure Australia has sounded the alarm in its latest Infrastructure Audit, saying that car travel times are set to increase by at least 20 per cent, and as much 100 per cent as the populations of Melbourne and Sydney are set to double over the next 50 years.

“Demand for public transport in the capital cities (measured by passenger kilometres travelled) is set to rise by 55 per cent in Sydney, 121 per cent in Melbourne and an average of 89 per cent across all capital cities.

“Unless peak period passenger loads are managed and capacity is increased, commuters in all capital cities will see more services experiencing ‘crush loadings’, where peak demand exceeds capacity.”

There are now two underground railway projects underway or announced: the North West Rail link in Sydney, which has four huge tunnel boring machines currently digging a 15km tunnel from Bella Vista to Epping, and Melbourne’s $10 billion (roughly) Metro Rail Project, recently announced by Premier Daniel Andrews.

Both projects should be the start of a big program of building underground railways using the new generation of mega-tunnel boring machines (although the plan in Melbourne is to save money by digging up Swanston Street and shutting all the shops for years, rather than tunnelling that bit, but that’s a whole other can of worms), but the agonising process of getting these two projects through Australia’s febrile political systems is hardly encouraging.

Sydney’s NW Rail Link was first announced in 1998. Since then it has been cancelled, re-announced, changed, blocked and announced again, as changes of government and conflicts between state and federal governments of different parties kicked the football up and down the field.

Melbourne’s new underground project was first announced 10 years ago and suffered similar politics to the Sydney one. Even now, as a Labor government announcement, it remains unfunded and bitterly opposed by the Coalition.

In fact it’s clear that political dysfunction, not cost, is now the sole blockage to Australia getting the infrastructure it needs, and specifically the underground railways and roads needed to reduce the congestion on the surface.

Alan Robertson, owner of Brisbane-based engineering firm Ausrocks, and an acknowledged expert on tunnelling, says the cost of excavation is now about a tenth of the total cost of a tunnel in Australia.

A tunnel boring machine that installs the lining behind it about $100,000 per metre of tunnel, according to Robertson. The cost of a fully installed tunnel, however, is now about $1 million per metre, he says.

The difference? Planning approvals and red tape, including necessary fire and safety regulations.

Even so, he says it’s now cheaper, at $1 million per metre, to build a new railway or road underground in Sydney than it is to buy the land and do it on the surface.

And in fact for many of the rail and road links needed to cut congestion in both Sydney and Melbourne, land was not set aside, so using it for transport would be impossible anyway.

Funding the projects should not be a problem either — the only reason it is seen as a blockage, such that all discussion on the subject centres on “users pays” models, is also because of political dysfunction.

Two months ago Morgan Stanley’s Australian economist, Daniel Blake, published a report in which he said Australia could borrow $80 billion for infrastructure without jeopardising its AAA credit rating.

He called the report “The Missing Fiscal Link”, and concluded that without a big fiscal stimulus focused on infrastructure to support failing monetary policy, Australia’s economic growth would not rise to the levels predicted by the government, and the level needed to get unemployment down.

Said Blake: “Fortunately, debt markets are wide open for both federal and state governments. Yields on commonwealth government securities (CGS) are the lowest on record, and we expect sustained global demand for AAA-rated assets. As a result, while funding through the ‘Asset Recycling Initiative’ has been impaired by politics, we see opportunity through CGS debt.”

Blake called for operating expenditure to be separated from capital expenditure in the federal budget, along the lines of proposals in the UK.

“This would create the political space for debt to be used to accelerate an infrastructure cycle (rather than for current expenditure), while the asset recycling initiative should be maintained — helping release equity from prior investments and set benchmarks for future spending.

“We believe the government should also consider the merits of infrastructure bonds alongside the reviews of taxation and the financial system, with the potential for tax-incentives to be provided for long-duration investment. Both of these plans are ambitious but, in our view, are politically realistic.”

Obviously Daniel Blake has been listening to music while he sits in traffic, and hasn’t had Question Time from Parliament on the radio. If he did, then hysterical, nasty debates about trivia would possibly change his mind about what is politically realistic in Australia.

Debt has become a political dirty word, for good reason: it has been used to fund recurrent expenditure and that has to stop.

Funding capital works, though, is a different matter entirely.

A century ago, when virtually all of the railway infrastructure that we still use was being built, there were minimal demands on state and federal budgets from health and welfare spending. Most taxation receipts were spent on infrastructure, such as railways, roads, electricity and communications — all of them owned and funded by governments.

Now fiscal budgets are mostly absorbed by welfare transfers and health spending, and there is none left for infrastructure. Therefore the cost of it must be taxed separately: there is simply no room to fund health and welfare, plus infrastructure, while keeping at taxation at a globally competitive level.

There are two ways of charging separately for infrastructure: user pays and community pays, via public debt. Governments prefer the former, with private companies inserted to run the projects and collect the money, because it doesn’t involve the dread D word and is politically at arm’s length.

Politicians can present private toll roads as just another business from which we buy services, and not a form of taxation at all (even though they are, really). Railways are more difficult because they generally don’t run at a profit, although that is changing with the new generation of driverless trains.

But it’s not just the direct users who benefit from roads and railways — the whole community does, by clearing congestion elsewhere and increasing national productivity.

It would be far more equitable and efficient if the projects were funded by public debt, especially with government interest rates at historic lows, with the debt partly serviced by tolls and partly by taxes on all road users.

I suppose it would be asking too much for such an idea to be bipartisan, on the grounds that we’re heading for a national emergency.

Oh sorry, I forgot. The national emergency was debt, wasn’t it?

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Australians’ wealth grew by $500 billion in 2014
THE AUSTRALIAN JUNE 22, 2015 12:00AM

Bridget Carter

Mergers & Acquisitions Editor
Sydney
Aussies $500 billion wealthier
North America remained the wealthiest region last year Source: Supplied

Boston Consulting’s annual global wealth report shows Australia is enjoying a wealth boom, with almost $500 billion added last year and more than $1 trillion over the past two years.

Wealth in Australia grew at 16 per cent last year, outpacing the global growth rate of 12 per cent.

The number of millionaire households in Australia rose by 18 per cent to 215,000.

Wealth growth in Australia was broadly based and characterised by the emergence of a new “millionaire middle class”.

“That trend continued in 2014, with private wealth in households in the range $1m to $5m rising by 26 per cent, significantly above the national increase of 16 per cent,” said Andrew Dyer, the leader of BCG’s financial services practice in Australia and New Zealand.

“Furthermore, the growth in wealth in households with less than $1m was also at high levels, rising by 14 per cent. These two segments are driving a broadly based wealth boom in Australia.”

Growth in wealth was underpinned by the high proportion of wealth in equities, at 42 per cent, compared with an average of 37 per cent in the Asia-Pacific region.

As part of its research, BCG defines total assets under management across all households, including cash and money market funds and listed securities held directly or indirectly. It excludes wealth in residences, owner-occupied homes or luxury goods.

The new BCG report forecasts a slight easing in the rate of wealth growth in Australia over the next five years, based on expectations of lower returns from equity and bond markets. However, private wealth is still expected to reach $4.9 trillion by 2019.

North America remained the wealthiest region last year, but is set to be overtaken next year by the Asia-Pacific region thanks to China and India.

Asia-Pacific (excluding Japan) was the fastest-growing region last year (up 29 per cent), followed by Eastern Europe (19 per cent).

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I think my assessment is inline with the below

"Australia's dollar is likely to drop below US70¢ next year as a struggling economy forces the central bank to reduce interest rates by as much as half a percentage point, according to BlackRock.

While the Reserve Bank of Australia is a "reluctant cutter", weak business capital spending will probably push policy makers into lowering the cash rate by a quarter point in either September or October from a record-low 2 per cent, said Stephen Miller, head of Australian fixed income at the world's largest asset manager. They could cut again in 2016 if the situation fails to improve, he said.

The RBA is grappling with an economy that's suffering from a plunge in commodity prices and looking for alternative sources of growth following a drop in mining investment. At the same time, it's wary of fuelling Sydney house prices that RBA chief Glenn Stevens has labelled "crazy." The currency's 17 per cent tumble in the past year has still left it above where the central bank says it needs to be to support growth.

"The economy has some really challenging headwinds," Miller said in an interview on Friday in Sydney. "70 cents, I still see that as a reasonable target by the end of this year and I think it probably goes lower in 2016."
http://www.smh.com.au/business/markets/c...htzaz.html

[greengiraffe]

Australian stocks remain cheap relative to other assets
ADAM CARR THE AUSTRALIAN JUNE 24, 2015 12:00AM

If you’re of the view that central bank pump-priming is driving up the value of all assets, and fundamentals are of less relevance, it’s very clear that Australian equities have missed the boat.

Indeed Aussie equities are relatively cheap against a broad range of markets — bonds, foreign equities, gold and property.

There are a number of implications. First, and for those concerned that a rate hike by the US Federal Reserve might lead to a sizeable equity correction, the Australian market should be more insulated. Not immune from any correction, just insulated, for the simple reason that our market has seen less support.

On a medium-term view the implications for the market are even better. At some point, this comparative cheapness will attract investors. There are many uncertainties hanging over the Australian market at the moment, sure, from the commodity price outlook to the threat of excessive regulation that hangs over our banking sector — to name but two. Yet at some point these concerns will abate. At that point, and it may not be far away, the comparative attractiveness of our market will stand out.

Investors live in a world of prolific currency debasement — where money or currency is no longer acting as a good store of value. So how is an investor to ascribe value to anything?

On traditional metrics most assets are already at, or close to, record prices, measured in monetary terms. Yet what information content does that hold? Not a great deal, because everything is expensive.

This is exactly what we should expect in a world of ultra-cheap money. So to say earnings multiples are stretched, or price-to-book values are elevated, etc, has less meaning. Indeed the general point that equities, bonds and residential property are expensive is meaningless, when what we value it against (money) is so cheap.

Relative value — where investors think of assets themselves as currency — becomes so much more important. Especially when the world’s major central banks are unlikely to end this ultra-low interest rate state anytime soon — even after the Fed hikes.

So investors already know that when it comes to bonds Australian stocks are extremely cheap. Then, again, so is nearly any stockmarket compared with its domestic bond market. So on a bond yield/earnings yield basis (the ratio of the 10-year government bond to the market earnings yield), the Australian stockmarket is at its cheapest in 15 years. In that sense, bonds have been a good store of value, yet we know logically that this isn’t the case as bond prices simply reflect arbitrary central banks purchases.

Another way of making this comparison to a broader group of assets is to simply deflate the price of one asset by another. This method is simple and it has its flaws, yet it does give some indication as to the relative richness or cheapness at a given point in time. Compared with gold, for instance, Australian stocks (MSCI index in US dollar terms) are currently trading at a 53 per cent discount (to gold) compared to pre-GFC levels.

Indeed you have to go back to the late 1980s to mid-90s before you see levels like this held for any reasonable period. Admittedly stocks don’t look so cheap on a longer-time period, but even then stocks are trading at a 10 per cent discount compared to the average ratio since the 80s.

Thought of another way — an ounce of gold buys more Australian shares today than it didn’t before the GFC. A lot more. It’s the same when you compare Australian stocks to the US equity market (MSCI index).

Currently, our market is the cheapest it’s been in about a decade — Aussie stocks are trading at a 14 per cent discount compared to the pre-GFC average. Thinking of US stocks as a currency, they buy more Aussie equities than at any time over the last decade.

Now there could be fundamental reasons for that — stronger earnings, for instance, or faster economic growth. That isn’t the case though, and even comparing relative price to earnings ratios, the outcome is the same. Nor is it the case that post-GFC nominal growth has been faster in the US — and yet US equities are better currency.

What’s more interesting is that viewed over a longer time horizon (say since the 80s), Australian stocks are even cheaper — at a 32 per cent discount. It’s a similar situation comparing Aussie equities to those in the emerging markets or Germany. Only against the British market could Australian stocks be said to be comparatively rich.

What about property? Well, for all the talk of a housing bubble, stocks don’t look especially cheap in comparison. Maybe at a discount of 6 per cent or so over the last decade, although that leaves stocks 25 per cent cheaper compared to the few years immediately before the GFC. In that sense property has still been a better currency — a better store of value — although, again, there are few fundamental reasons to think that should be the case.

Aussie stocks are cheap, very cheap with respect to many other assets. In an ultra-low-rate world, we shouldn’t expect that discrepancy to hold for long.