Our two-speed economy

Andrew Pegler – 16 April 2010

Right now our economy needs antipsychotics. It’s a babbling mess, unsure if it’s Arthur or Martha.

Back in 2006 Secretary Treasury Ken Henry pointed out a rather odd phenomenon: our economy had a split personality. Some parts were rocking along while others were contracting. There was no uniform prosperity – it was all over the shop. Manufacturing and consumption were down, employment was wobbly but GDP was stable and growing thanks to busy Aussie diggers and drillers piling up tankers bound for Asian nation building projects. He called this a dual-speed economy. I call it a two-speed economy. He says potato I say potarto etc.

Economic history has a way of repeating itself (they’re not called economic cycles for nought). Again resource exports are hitting new highs and tankering in tonnes of money while tourism, education, primary produce and manufacturing are actually pretty limp, even contracting. Yep that’s right folks, we’ve moved forward to the past.

Pourquoi?

The resources boom is pumping the dollar big time and at last check it was racing towards US 94c. This makes the globally exposed, non-resources bits of our economy like tourism, manufacturing, primary production and education more expensive to overseas markets and therefore less attractive. Think high-class mutton in Prada dressed as lamb. (There’s a gag there about the Aussie economy founded on the sheep’s back but I’ll leave it.) Then there’s the cash splash and three million plasma TVs later household disposable income is now back to where it should be, hence weak consumption more aligned to the post-GFC world. And finally a lingering credit crunch continues to put the squeeze on small business and property development. As if driving home the two-speed thesis, a report by BIS Shrapnel claims the number of large-scale property construction developments that have driven growth over the past decade will slow by six per cent over the next few years leaving mostly minerals or commodities-related major developments to carry the can.

This yin and yang economics means a few things for you. For starters resource companies will become the fastest growing employer and manufacturing states like Victoria will lose out to resource-rich states like WA and Queensland. But the good news is this pull in opposite directions is taking the heat out of the economy and will give the RBA board good cause to pause.

And in other news… further to the two-speed theme of this blog, as reported on PM the other day, despite houses being auctioned at record levels every weekend there’s been a dramatic slump in the number of home loan approvals. The culprit? A two-tiered housing market. On one level we have cashed-up investors buying established homes. On the other are first homebuyers who are being priced out the market. As pointed out in last week’s blog the solution is more supply. Bring it on!