Australian Economic News

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Reserve Bank warns of ‘significant’ uncertainty ahead
BUSINESS SPECTATOR AUGUST 19, 2014 11:48AM

Elizabeth Redman

Business Spectator Reporter
Melbourne
LOW interest rates are likely to continue for a while yet as the Reserve Bank of Australia waits to see how the nation’s current economic challenges play out.

In the minutes of its August 5 board meeting, the RBA warned of a “significant degree” of uncertainty about the economic outlook, but reaffirmed its view that a period of stability in interest rates was likely to be prudent.

The minutes show the board expects inflation to remain consistent with its target of 2 per cent to 3 per cent over the next two years, despite a recent rise.

The bank again commented that the exchange rate remained high and was offering less assistance than it could in achieving balanced economic growth.

At its August meeting, the central bank again left the official cash rate on hold at a record low 2.5 per cent, meaning the rate has now been steady for an entire year.

“Members noted that there was inevitably a significant degree of uncertainty about the outlook, given the number of forces working in different directions,” the RBA said.

“The board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates.”

The central bank is waiting to see how the economy shifts away from its dependence on mining investment, which is declining after being a key driver for around a decade.

Economic growth was above average in the March quarter, driven by strong growth in mining exports and a pick-up in non-mining activity, the RBA said.

It said current indicators suggested that mining exports were little changed in the June quarter while mining investment had continued to fall.

But non-mining investment doesn’t appear ready to pick up the slack.

“Indicators of investment intentions in the non-mining sector were showing signs of improvement since the latter part of 2013, although liaison suggested that businesses were reluctant to commit to major new investment projects until they perceived a sustained pick-up in demand,” the RBA said.

“Overall, GDP growth was likely to have slowed to a more moderate pace in the June quarter and was expected to be below trend over 2014-15, before picking up thereafter.” Low interest rates were continuing to support demand in the economy, the RBA said.

The Australian dollar, however, remained high by historical standards and “hence was offering less assistance than it might in achieving balanced growth in the economy”.

The RBA said dwelling investment was likely to remain strong in the period ahead while established house price growth remained robust.

It said it was likely to be some time before unemployment declined consistently, suggesting subdued wage growth which would keep inflation within the RBA’s 2-to-3 per cent target band.

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Dividend surge worries Stevens

Jacob Greber and Sue Mitchell
645 words
21 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Reserve Bank of Australia governor Glenn Stevens has expressed frustration at the level of investment by corporate Australia, which is choosing bigger dividends over new factories, ­equipment and hiring workers.

Wesfarmers, owner of Coles, Bunnings and Officeworks, said it would return a record $3.4 billion to shareholders, news that helped the S&P/ASX 200 reach its highest close since just before the 2008 financial crisis. But economic growth remains sub-par.

Mr Stevens said the key barrier to growth was a lack of "animal spirits", not a need for lower interest rates.

"I have allowed the horse to come to the water of cheap funding, I cannot make it drink," he said. The remarks prompted Goldman Sachs – the last hold-out among leading forecasters – to ditch its prediction that interest rates would fall.

The corporate reporting season has been marked by the return of more than $15.5 billion to shareholders – led by companies such as Commonwealth Bank of Australia and Telstra – up from $13.6 billion at the same time a year ago, according to CIMB.

Richard Goyder, managing director of Wesfarmers – which spent $2.3 billion on capital investment last year – denied his company wasn't investing in the economy.

Wesfarmers will this year open 20 Bunnings and a similar number of Coles stores, and employ "several thousand more people", he said. "We're very much on the lookout for opportunities to expand and build," he said.

"We're not sitting on our hands; we're just disciplined in handing money back to shareholders and trying to maintain a balance sheet that gives us the flexibility to do things."

Mr Stevens, speaking to a parliamentary committee in Brisbane, said even though official interest rates had been on hold at a record-low 2.5 per cent for a year, mortgage rates have fallen by an additional 15 basis points – or about half an official rate cut, delivering further stimulus to the economy.

He warned the jobless rate was expected to stay high through 2015, describing the outlook for growth and employment as "kind of OK, but it is not quite as good as I would like".

The remarks are a clear sign the Reserve Bank board is entrenching its opposition to further policy stimulus, not least because of the risk of unleashing a housing bubble. "The thing that is most needed now is something that monetary policy cannot directly cause," Mr Stevens said. "We need more of the sort of so-called 'animal spirit', or confidence if you like, that is needed to support not just a repricing of the existing stock of assets, but the investment that adds to that stock of physical assets."

While there were "some encouraging signs", Mr Stevens said there was a need to provide entrepreneurs and innovators with the incentives to say; "I'm going to take that risk; I'm going to get that cheap money and build that plant, factory . . . and employ people."

Earlier in his testimony, he said: "If reports are to believed, many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders and are somewhat less focused on implementing plans for growth.

"Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand."

Deputy governor Philip Lowe said there was a need to enliven innovation "so that we can be the type of country that has high value-added, high wages and high productivity.

"Culture is important here. Our society is becoming too risk averse . . . we are not paying enough attention to return and we are paying too much attention to risk," he said.

"We need to invest more and more effectively in education, in human ­capital accumulation and in infra­structure."

With Vesna Poljak


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Bank loan limits won't stop crashes, says IMF

Bianca Hartge-Hazelman
507 words
22 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Doubts over whether Australia should impose stricter debt limits on banks and borrowers have been raised by a new International Monetary Fund report that concludes such an approach has been found to be ineffective in preventing a crash in asset prices.

The report, released this week, looks at the effectiveness of macroprudential policies, such as caps on debt-to-income and loan-to-value ratios imposed on borrowers, as well as limits on financial institutions in terms of credit growth and foreign currency lending.

It found that although these tools reduce growth in asset prices, they may not necessarily reduce systemic risks, can also be costly to an economy and put the brakes on financial cycles.

The report, written by Stijn Claessens, Swati Ghosh, and Roxana Mihet for the IMF, said: "While our results suggest that macroprudential policies can be important elements of the toolkit aimed at overall systemic risk mitigation, especially for countries exposed to international shocks, the adoption of such policies may also entail some costs.

"In particular, in as much as macroprudential policies affect resource ­allocations, they may affect economic activity and growth and/or possibly limit (efficient) financial sector development."

The release of the report, which is titled Macro-Prudential Policies to Mitigate Financial System Vulnerabilities, comes at a time of rising house prices in Australia, fuelled by record-low interest rates and a renewed willingness by the country's big four banks to lend more following the financial crisis.

The findings are also likely to add to the recent controversy surrounding the effectiveness of macroprudential tools imposed by the Reserve Bank of New Zealand (RBNZ).

Last year, the RBNZ introduced limits on the amount of loans that banks can lend to borrowers with less than a 20 per cent deposit.

But as The Australian Financial Review has learnt, some academics say there is little evidence that such rules are working to ease house price pressures.

There remains considerable debate among economists and financial experts as to whether Australia is in the midst of a housing bubble, fuelled by pent-up demand, and if greater controls are needed to help prevent a crash in asset values, like that seen in the US during the 2007 financial crisis.

JPMorgan chief economist Stephen Walters believes over-leverage by Australian households is what makes the country most vulnerable to an economic slowdown and even at risk of recession. This is technically defined as being two consecutive quarters of negative growth and has not taken place for 23 years.

The report also found that tools controlling borrower debt limits seemed to work better in advanced countries, which the authors noted "ought not to surprise, given that real estate boom and bust cycles are more important in determining their overall financial cycles".

There was also some evidence that a package of macroprudential policies was better in emerging markets, perhaps as their "financial systems are less liberalised" and more in need of protection against risks.


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Demand for 457 visas plummets
THE AUSTRALIAN AUGUST 25, 2014 12:00AM

Natasha Bita

National Correspondent
Brisbane
457 migrant visa applications.
457 migrant visa applications. Source: TheAustralian
RISING unemployment has dampened demand for migrant workers, with 40 per cent fewer foreigners seeking visas to work here last financial year.

The number of foreigners ­applying for a four-year work visa fell below 50,000 during 2013-14 — and the number of foreign tradies looking for work halved to 12,000.

Thousands of migrant workers flocked back to their home countries during the year, triggering the cancellation of nearly 29,000 work visas.

Visa applications from foreigners for clerical and administrative jobs crashed 80 per cent to just 660 during 2013-14, compared with 3370 the year before.

As Australia’s unemployment rate rose to 6.1 per cent last financial year, the number of foreign managers applying to work here fell 41 per cent to 9720. Visa applications from professionals fell almost a third to 24,810.

The biggest employer of foreign workers — the tourism and hospitality sector — saw applications halve to 5330 during the year.

Migrant work visa applications also halved in the construction sector — down to 4490 — and fell 55 per cent in the mining industry, to 2600 applications.

Despite the slump in new ­applications, the number of ­migrants already working in Australia on the four-year 457 work visas crept 0.8 per cent higher last financial year to 108,870 workers.

More than 40,000 backpackers, foreign students and migrants on 457 work visas had their visas cancelled during 2013-14, The Australian can reveal.

Unpublished Immigration Department data shows it cancelled 27,904 of the 457 visas during the year — 45 per cent more than in 2012-13.

A spokesman for Assistant Minister for Immigration Michaelia Cash yesterday said most of the 457 visas had been cancelled “following the voluntary departure of a visa holder as a result of their employers advising of the end of employment’’.

“Given this is a demand-driven program, the total numbers of cancellations generally reflect the demand for overseas labour,’’ he said. “This slowdown in growth of the program is likely due to the softening labour market as well as a combination of regulatory reform and better targeted monitoring and compliance activities.’’

Construction, Forestry, Mining and Energy Union national secretary Michael O’Connor said the fall in job applications from migrant workers proved that ­labour market testing was helping Australians find jobs.

Under changes introduced by the former Labor government last year, employers must advertise for local staff before hiring migrant workers.

The “labour market test’’ only covers a quarter of the 457 visa ­occupations, including the trades.

“Labour market testing should be extended and monitored,’’ Mr O’Connor said.

“At the moment, labour market testing can involve putting an ad on a Facebook page for five minutes.”

Monash University demographer Bob Birrell, of the Centre for Population and Urban Research, said foreign students, backpackers and 457 visa workers accounted for one million workers in Australia. “Graduates are finding it tough because of competition from skilled migrants, particularly in nursing, ICT, accounting and ­engineering,’’ he said.

“Most of the net growth in jobs in the past three years has been taken up by people who arrived from overseas in that period, putting enormous pressure on young people seeking entry-level jobs.’’

Employment Minister Eric Abetz has instructed his department to investigate CFMEU claims that employers have tried to hire foreign workers despite Australians being available to do the work. He urged unions to contact the Fair Work Ombudsman about any loopholes allowing ­employers to exploit 457 temporary work visas. Senator Abetz said he was concerned by a report in The Australian that labour market testing had resulted in the Immigration ­Department knocking back nearly one in 10,457 visa ­applications.

He insisted that employers should hire “Australians first’’.

“We should be testing the job market,’’ he said. “Everybody in this government is committed to providing jobs for Australians first, if at all possible. If we do have labour shortages in certain areas it makes good sense to open up the opportunities to people from other countries but first and foremost we have an ­obligation to provide employment opportunities to our fellow Australians.”

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Private sector credit misses forecast
AUGUST 29, 2014 11:45AM

Elizabeth Redman

Business Spectator Reporter
Melbourne
The value of loans outstanding to the private sector rose at a slightly slower than expected pace in July, Reserve Bank of Australia data shows.

The central bank's financial aggregates for July show total credit increased by 0.4 per cent, after increasing by 0.7 per cent in June.

The figure is slightly shy of analyst expectations of a 0.5 per cent increase in the month.

Over the year to July, total credit rose by 5.1 per cent, in line with forecasts, compared with a 3.2 per cent lift over the year to July 2013.

Personal credit inclined 0.2 per cent in the month after lifting 0.7 per cent in June.

Business credit rose by 0.3 per cent in July, after increasing by 0.9 per cent in the previous month.

Housing credit grew by 0.5 per cent in July, after lifting by 0.6 per cent in June.

Broad money, which includes currency, deposits and other short-term liquid liabilities, rose by 0.9 per cent in the month, after lifting 0.6 per cent in June.

Meanwhile, housing loans rose 6.5 per cent over the year to July, compared with 4.6 per cent growth in the previous year.

Personal loans lifted 0.8 per cent in the year to July, up from a 0.6 per cent lift in the prior year.

Business loans lifted 3.4 per cent over the year, compared with a 1.2 per cent rise in the previous year.

Broad money rose 7.3 per cent over the year, up from 5.6 per cent over the prior year.

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Business confidence at 10-year high
AAP SEPTEMBER 02, 2014 1:45AM

Retailers' hopes of a good Christmas have driven the number of companies expecting profit growth in the coming months to a 10-year high.

Of the 800 businesses surveyed by researcher Dun & Bradstreet, 40 per cent expect their profit in the final three months of 2014 to be higher than in the same period a year ago.

Just 11 per cent expect a fall.

That has sent Dun & Bradstreet's profit expectations index to its highest level in a decade.

Retailers were the most optimistic of those businesses, indicating they are confident consumers will spend big this Christmas.

More businesses also expect to hire staff and increase investment, and Dun & Bradstreet's economic adviser Stephen Koukoulas said rising confidence could boost the economy.

"Not only are expected sales at an 11-year high - a sign of buoyant activity - but expected profits are at a level well above the long run average," he said.

"In the past, firms have only held this level of optimism when the underlying economic conditions were strong.

"D&B's data suggest that the economy is poised to run at, or even above, trend levels in the second half of 2014, with expected employment and capital expenditure also well above the long run average."

Even better for businesses, the survey showed an increase in the number expecting prices to moderate, which would mean less pressure on the central bank to lift interest rates.

"A low inflation climate will be vital for the Reserve Bank of Australia to keep its interest rate settings on hold," Mr Koukoulas said.

Businesses in the retail, services, finance and real estate sectors are the most optimistic about the coming three months, while there was a drop in the number of companies in the manufacturing, construction, transport and utilities sectors forecasting profit growth.

Growing business confidence was backed by improving conditions in the second quarter of 2014, Dun & Bradstreet said, with profits higher among those businesses surveyed.

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RBA maintains run of record low rates
THE AUSTRALIAN SEPTEMBER 02, 2014 3:30PM

Adam Creighton

Economics Correspondent
Sydney


Rates on hold amid conflicting signals
http://cdn.newsapi.com.au/image/v1/exter...z9c5xuj3mc
THE Reserve Bank of Australia has kept official interest rates on hold at record lows as investors await the official update of Australia’s economic growth rate and remarks from RBA governor Glenn Stevens at lunchtime tomorrow.

For the 13th month in a row the RBA has kept the official cash rate at a historic low of 2.5 per cent — one of the longest periods of stable rates — unable to lift rates for fear stifling the fragile non-resource economy or cut them for fear of exacerbating a rampant residential property investment market.

The RBA has repeatedly stressed the likelihood of “a period” of low and stable interest rates since it met February this year, noting the tepid improvement in investment outside the resource sector, alongside significant increases in house prices and a growing pipeline of home building.

Governor Stevens said in a statement after the September board meeting that low interest rates were helping support economic growth.

“There has been some improvement in indicators for the labour market this year, but it will probably be some time yet before unemployment declines consistently,” he said.

“Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year.”

The RBA again said the Australian dollar was high by historical standards, particularly given the declines in commodity prices. “And hence is offering less assistance than it might in achieving balanced growth in the economy,” Mr Stevens said.

The most prudent course is likely to be a period of stability in interest rates, he said.

The RBA’s statement covered familiar territory and contained no great surprises, HSBC chief economist Paul Bloxham said.

But the board was clearly still worried about the effects of the high Australian dollar, he said.

“The currency is constraining Australia’s great rebalancing act,” Mr Bloxham said.

“It seems pretty clear that low interest rates are doing what they’re supposed to be doing, they’re supporting the housing market, they’re supporting an upswing in residential construction but growth is not completely rebalancing because the Aussie dollar remains too high.

“That is the ongoing theme from the RBA and while the Aussie dollar remains high, the RBA is unlikely to do anything with interest rates, so we think they’ll be on hold until the middle of next year.”

National Australia Bank senior economist Spiros Papadopoulos said it looked like the RBA was happy to keep the cash rate unchanged given mixed signals in the economy.

“They were positive about a couple of factors, they noted the improvement in (consumer) confidence and better signs of investment intentions coming through in the non-mining sectors,” he said.

“But on the flip side the Aussie dollar is still too high and there has also been a jump in the unemployment rate.”

In August the unemployment rate rose to 6.4 per cent, from 6 per cent in July.

Mr Papadopoulos expects the RBA to leave its interest rate unchanged for at least the next 12 months.

“The latest housing market statistics were likely a topic of conversation around the RBA board table when they met today,” said RP Data’s research director Tim Lawless, noting a 4.2 per cent rise in dwelling values across the combined capitals over the three months of winter.

“If higher home values were accompanied by a relaxation in lending standards that would be cause for concern, however recent APRA data showed a falling share of loans with high loan-to-value ratios,” he added.

The bank’s decision came hours after the Australian Bureau of Statistics revealed the current account deficit had blown out by 76 per cent over the three months to June to $13.74 billion, a symptom of falling prices for coal and iron ore, Australia’s two biggest exports.

The ABS also said the monthly level of council approvals increased further in July, rising 1.5 per cent to 9500, almost 15 per cent higher than a year ago as low interest rates have acted to encourage home building.

Economists are expecting Australia’s quarterly economic growth to fall to around 0.4 per cent over the three months to June from 1.1 per cent the previous quarter, which would leave Australia with an annual growth rate of 3 per cent.

In his testimony before the House Economics Committee last month, governor Stevens pointed out mortgage rates had this year fallen by the equivalent of around 0.25 percentage points without it adjusting policy.

With AAP

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Red-hot housing puts RBA on alert
THE AUSTRALIAN SEPTEMBER 03, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney
THE Reserve Bank appears more worried about rapid house price growth following its decision to keep interest rates on hold at record low levels for the 13th month in a row — the longest period of ­official interest rate stability in more than eight years.

Financial markets anticipated yesterday’s decision by the RBA board to keep interest rates at 2.5 per cent — the dollar barely shifted from around US92.9c after the announcement — but the RBA removed reference to a midyear slowing of house prices.

“The increase in dwelling prices continues,” governor Glenn Stevens said, removing the previous month’s reference to house prices rising more slowly this year than last year in a monetary policy statement that was slightly more optimistic than last month’s.

GRAPHIC: RBA annotated statement

“The RBA is clearly not endorsing current market pricing favouring rate cuts,” Commonwealth Bank chief economist Michael Blythe said.

“Our thinking more broadly favours upside risks to RBA growth and inflation projections,” he added, arguing the RBA’s inflation forecasts were too optimistic and growth too pessimistic.

Mr Stevens’s comments followed data showing house prices in Sydney and Melbourne have been rising at annualised rates above 10 per cent, a phenomenon on which he is likely to face questions when he speaks in Adelaide today. The governor once again stressed the prudence of “a period of stability” in rates, while noting a tepid improvement in investment outside the resources sector.

“The RBA appears a touch more confident that the transition towards non-mining drivers of economic growth is occurring gradually,” said Riki Polygenis, a senior economist at ANZ, stressing that the interest rate regulator’s view had not materially changed.

Mr Stevens’s statement echoed arguments canvassed at greater length in the bank’s recent August economic update, which shaved forecasts for economic growth and inflation, and made veiled reference to the rise in unemployment to a 12-year high of 6.4 per cent.

“The bank’s assessment remains that the labour market has a degree of spare capacity and that it will probably be some time yet before unemployment declines consistently,” Mr Stevens said.

Economists are expecting the quarterly economic growth rate — updated in today’s national accounts — to fall to about 0.4 per cent over the three months to June from 1.1 per cent the previous quarter, which would result in an annual growth rate of 3 per cent. The RBA expects growth to be a little below this level in coming years.

While the governor’s statement yesterday removed reference to a surge in home building, the ABS said the monthly level of council approvals of new houses had increased further in July to 9500, almost 15 per cent higher than a year ago.

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Retail spending in modest rise as shoppers loosen purse strings
THE AUSTRALIAN SEPTEMBER 05, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney
Laneway
Retail spending rose 0.4 per cent in July led by NSW and Victoria, as households shrugged off post-budget blues. Picture: <span class="creditattribution">Katrina Bridgeford</span> Source: News Corp Australia
SHOPPERS in Australia’s two biggest states are leading a modest retail revival as consumers shake off their post-budget blues and enjoy the unseasonably warm winter weather at cafes and restaurants.

Total bricks and mortar spending rose 0.4 per cent in July to a seasonally adjusted $23.31 billion while spending at cafes, ­restaurants and takeaway food jumped 1.4 per cent to $3.3bn.

“NSW and Victoria are the most sensitive to interest rates and as such they have been driving the national lift in both retail trade and house prices,” said Commonwealth Bank economist Garath Aird, noting that retail spending grew 0.7 per cent and 0.6 per cent ­respectively in those states.

The Reserve Bank has not cut interest rate since last August, but governor Glenn Stevens has said that competition has dragged down key lending rates 0.15 percentage points since then, and has warned housing investors not to overextend themselves, ­especially in Sydney and Melbourne, where annual house-price growth is in double digits.

Department stores had a promising month, too, rising 1.9 per cent to $1.5bn in July, but not enough to offset the slump of almost 3 per cent over May and June in the wake of the government’s controversial budget.

And, in a rare month of promising news for the publishing ­industry, spending on newspapers and books rose 1.3 per cent.

“The more recent indicators of confidence have rallied over the last couple of months as it ­becomes clear that fiscal tightening might not be as immediately binding on household income as feared,” said Ben Jarman, a senior economist at JPMorgan.

Joshua Williamson, an economist at Citi, said the figures corroborated information in the latest national accounts, released on Wednesday, that showed higher spending on recreation and cultural activities.

“This item is the third-largest household expenditure item after the essential of ‘rent and other dwelling services’ and ‘food’ and it is increasing as a proportion of total household consumption,” he said, noting spending on cafes and restaurants was up 11 per cent over the year.

Maximum daily average temperatures across Australia were 0.9 degrees greater than normal, including 1.2 degrees above in NSW in July and 0.9 degrees higher in Queensland, according to the Bureau of Meteorology.

While the ABS reported an­nual retail spending growth of ­almost 5.8 per cent over the year to July, National Australia Bank’s survey of online retail spending showed even faster growth of 8.6 per cent to $15.6bn (about 6 per cent of total bricks and mortar retail spending). Spending on electrical goods and clothing — typically imported — fell between 0.8 and 1 per cent, however.

“One month doesn’t make a trend, but the sustained increase in tradables inflation might be starting to bite on demand for larger imported items, which had previously experienced such marked deflation,” Mr Jarman said.

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Economy enters danger zone

Jacob Greber, Angus Grigg and Amanda Saunders
1136 words
5 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
The federal government's former top resources forecaster says the economy faces a painful downturn in 2015 as a property crisis in China accelerates the biggest hit to Australia's export income in more than two decades.

Speaking after iron ore plunged to a five-year low of $US85.70 a tonne, the former chief economist and head of the Australian Bureau of Resources and Energy Economics, Quentin Grafton, said the Chinese economy looked like it was "unravelling".

He said falling prices for coal and iron ore, a slump in business investment, an overpriced housing market and high dollar had placed the Reserve Bank of Australia "between a rock and a hard place". "Put all those things together and it could be a difficult ride for us," he said. "This isn't about doom and gloom – it's about looking at the risks and numbers. There's a clear and present danger."

The remarks add to doubts about the economy's underlying resilience and the robustness of the government's revenue expectations after this week's national accounts showed income fell in 2013-14 and 2012-13, the first two-year decline since the early 1990s recession.

The incomes crunch looks likely to continue. Falling commodity prices in recent months further depressed the terms of trade, a broad measure of what Australia can buy with its export earnings and a key driver of tax revenues and living standards.

The benchmark price for iron ore – which accounts for more than $1 out of every $5 of export income – has fallen 35 per cent this year to around half its 2011 high of $US190.

In a sign of how rapidly demand for steel has dropped in the world's second-biggest economy, police arrested more than 40 steel traders in Shanghai for credit card fraud who were apparently trying to circumvent a crackdown on lending by banks to the troubled sector.

Fund manager Evy Hambro, who oversees a $US7.3 billion global mining fund for BlackRock, said it was odd the Australian dollar had remained high given weak iron ore and coal prices. "That relationship seems to be unusual, and therefore it's likely that something is going to give. It could be that the Australian dollar weakens or that the iron ore price recovers in the near term. Our best guess is that it's probably a little bit of both."

The dollar held steady around US93.35¢ on Thursday despite falling commodity markets.

The iron ore price has been driven down by fears a crash in China's property market, which experienced its worst drop on record in July, could have a big impact on the Chinese economy. Property prices declined in 91 per cent of the 70 cities surveyed by China's National Bureau of Statistics, as buyers put off making a purchase due to concerns about over-supply. In July, property sales declined by 17.9 per cent from a year earlier. The number of unsold apartments rose by 25 per cent over the same period.

Researchers at Texas A&M University estimate China has a residential vacancy rate approaching 20 per cent and there could be as many as 48 million empty apartments across the country after years of over-building.

Former Labor trade minister Craig Emerson criticised economic commentators for being "too sanguine" about the risks facing Australia.

He said the Abbott government appeared to be softening up voters for revenue downgrades in the mid-year budget update, noting Treasurer Joe Hockey's remarks on Wednesday that prices for iron ore were now well below forecasts in the May budget.

"There's a genuine challenge here that's not going to go away with a turn-up in the next quarter's numbers," said Dr Emerson, who now runs a Canberra-based economic consultancy.

"Iron ore and coal continues to fall, so the income that we get from overseas is continuing to slow – and at this stage we're not getting a sustainable source of income to replace it," he said.

Debate about Australia's income shock intensified this week after the Australian Bureau of Statistics reported per capita net national disposable income fell 0.4 per cent last financial year, adding to a 1.6 per cent decline in the previous year.

Other than the early 1990s downturn, the last time there were two straight years of falls was during the 1960s credit squeeze.

Independent senator Nick Xenophon said the economic news made him despair at the lack of a consensus among politicians on how to restore economic resilience. He compared Canberra to the "gridlock" that has become a feature of the US Congress.

He urged MPs to educate themselves about the national income story.

"We are in denial and we've become a sideshow," he said. "I don't want ­Australia to be the Argentina of the 21st Century."

Professor Grafton, now at the Australian National University's Crawford School of Public Policy after heading the Federal Bureau of Resources and Energy Economics between 2011 and 2013, called for renewed focus on regulating the banking sector to head off potential problems, reforming taxes and fixing budget problems.

"There's a whole range of things we need to be thinking through and we do need to do it sooner rather than later given there are very real risks," he said.

"I'm really concerned about 2015 – investment growth is coming down substantially, we have asset prices at record highs and we do seem to have a high dollar that's put the Reserve Bank between a rock and hard place. And then there's China. I'm no China expert but it seems to be unravelling."

One of the drivers of the falling iron ore price appears to be the fact that many Chinese traders in the commodity have been caught with excess stock over the past year, prompting them to sell at a loss as prices declined.

To finance this shortfall, they booked fake transactions on credit cards in exchange for cash, according to Shanghai police.

The arrests are likely to renew worries about non-performing loans in China, as they highlight once again the lax lending policies at many banks.

Earlier this year banks were caught out extending multiple loans against the same cargos of copper and iron ore at the Port of Qingdao.

This has seen banks tighten lending to the commodities sector and may have prompted some to begin using credit cards to finance their business.

Shanghai police said one steel trader had eight credit cards with a combined monthly limit of 1 million yuan ($175,000). Police said the credit carddebts for the 40 steel traders arrested in Shanghai totalled 5 million yuan.


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