Working Papers

Gloom, Doom and Boom Competition: We Have a Winner!

This week’s record current account deficit once again provided rich pickings for our quarterly Gloom, Doom and Boom competition for overwrought reporting.  AAP deserves the Speedy Banana Award for referring to a ‘banana republic’ in a story just minutes after the release: 

As a proportion of GDP, the current account deficit is around a record 7.2 per cent, prompting analysts to warn Australia is in danger of becoming a “Banana Republic”.

Of course, no analyst was actually quoted as saying anything of the sort, suggesting that AAP was engaging in the usual colour-by-numbers financial market journalism.

John Garnaut gets some credit for running a (somewhat selective) version of the consenting adults view of current account deficits, but then disappoints when he says:

The current account deficit, or CAD - which reflects the shortfall between exports and imports as well as financial transactions with the rest of the world - showed Australians paid foreigners $15.6 billion more than they received from them in the three months to March.

In fact the CAD shows the opposite – that foreigners lent us $15.6bn to make-up the shortfall between domestic investment and saving.

John Quiggin (in comments) seemed almost ready to concede the consenting adults view, noting:

Past experience would suggest either a recession or a sustained period of low growth, particularly in consumption. But we’re in uncharted territory here, and the optimists say global financial markets will look after us.

As RBA Governor Macfarlane noted in his most recent testimony to the House Economics Committee, many people were declaring the US current account deficit unsustainable at 5%.  The new cyclical highs in the US and Australian current account deficits suggest that there has also been a structural deterioration in the current account balances of both countries.  Quiggin questions whether we are heading for a current account deficit of 10% of GDP.  In a world of floating exchange rates and mobile capital, there is no reason why such large deficits should not be possible.  Indeed, deficits of that size would be a massive vote of confidence in the Australian economy.

The lucky winner of our competition, however, goes to…

Opposition Treasury spokesman Wayne Swan, who rolled out every current account cliché in the book:

The shadow treasurer, Wayne Swan, said the figures were “humiliating” and jeopardised Australian living standards.

In fact the figures underwrite Australia’s standard of living.  Lowering the current account deficit would require us to cut either consumption and/or investment to fit the silly prejudices of Swan and others who think they know better than markets what Australia’s saving-investment balance should look like.

“As a nation, we’re living beyond our means, importing too much and borrowing far too much from the rest of the world,” he said.

All of which is demonstrably untrue, unless you can make a compelling case for massive and systemic market failure.  You would think the Labor Party would learn from the fact that the Government is now being taunted by its own silly rhetoric on foreign debt from when it was in opposition.  A growing Australian economy requires a rising foreign debt and any political party that promises to reduce it is implicitly condemning us to a lower standard of living.

posted on 01 June 2005 by skirchner in Economics

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Of course, Argentina got some pretty massive votes of confidence in the late 1990s

Posted by quiggin  on  06/01  at  01:41 PM

John: Argentina in the 1990s was the victim of a fixed exchange rate, a totally different case.  I thought we had ditched the Australia-Argentina comparisons back in the early 80s!

Posted by skirchner  on  06/01  at  02:07 PM

We are a Banana constitutional monarchy Stephen.
Get the Facts right!

I have much less confidence than you that the international capital markets would continue to suport us if these present levels continue.

history backs me up but of course history is not always right

Posted by .(JavaScript must be enabled to view this email address)  on  06/02  at  11:44 AM

Much of AUS’s post-2000 economic boom has come from financial incentives for property investment. This has not led to any increase in the earnings from the “accommodation” sector, as measured by rental income to property price ratios. Thus real productivity growth rates have slumped. Property developers have created an economy that is alot more ornamental, but not one that is very much more productive.

Posted by Jack Strocchi  on  06/02  at  02:18 PM

Jack, that is not what the data are saying.  The investment share of GDP has been at record highs in real terms at around 25%, with dwelling investment accounting for only around 7 ppts of this.  National saving as a share of GDP is little changed.  The current account deficit is attributable to an investment boom in which housing has played a relatively small part.

Posted by skirchner  on  06/02  at  05:13 PM

Stephen, can you point to the source of this information?  Everything I’ve found at the RBA suggests that housing credit has expanded much faster than business credit over the past decade, household saving is negative and (as we know) the CAD is at record levels.

If we have been investing our overseas borrowings in something more productive than empty apartment buildings that would indeed be great news, but I can’t find any evidence of that.

Chart of credit aggregates Mar96-Mar05 (RBA)

Chart of household saving Mar96-Mar05(RBA)

Posted by .(JavaScript must be enabled to view this email address)  on  06/03  at  05:54 PM

Sorry, the second link should have been:

Posted by .(JavaScript must be enabled to view this email address)  on  06/03  at  06:19 PM

Jack, go to the ABS and look at the national accounts.

Posted by skirchner  on  06/03  at  07:31 PM

Sorry, Jack, I meant David, but it wouldn’t hurt you either!

Posted by skirchner  on  06/03  at  07:33 PM

Stephen, the national accounts document (5206.0) I found at the ABS website doesn’t seem to have much detail.  It shows that dwelling investment has fallen away in the March quarter (but that would be expected) what it doesn’t show is the rapid growth of dwelling investment over the past four years.

This spreadsheet at the RBA website includes historical data going back to 1959:


It shows dwelling investment (column N) has grown much faster than equipment investment (column P) over the past 5-10 years.

I made a nice chart in Excel which I’ll email to you.

Posted by .(JavaScript must be enabled to view this email address)  on  06/03  at  09:43 PM

GDP shares are based on the level of the series not growth rates.  You also need to deflate the nominal series by the relevant deflators.

Posted by skirchner  on  06/04  at  10:24 AM

Ok ... but dwelling investment represented around 4.7% of GDP four years ago (Dec 2000) vs 6.6% of GDP today (Dec 2004) whereas equipment investment has remained static at around 6.7% of GDP.

Posted by .(JavaScript must be enabled to view this email address)  on  06/04  at  04:24 PM

Just a thought but it might be better to look at the figures in nominal terms given the ABS’s less than robust belief in the deflators for equipment ie computers etal.
Getting the figures is sometimes more guesswork than science

Posted by .(JavaScript must be enabled to view this email address)  on  06/04  at  04:58 PM

David, dwelling investment fell off a cliff in the second half of 2000 after the introduction of the GST, so this is not the best point of comparison.  I would suggest that what we have seen since is partly making up for this earlier weakness.  As with house prices, we need to keep this in cyclical perspective.  People forget that it was only a few years ago that policymakers were desperately trying to rescue the housing sector from a severe downturn!

Posted by skirchner  on  06/04  at  05:10 PM

Ok, Stephen you pick a date.  In fact, plot a chart of dwelling investment as a percentage of GDP for any period in the past 20 years and I guarantee you it will show you that the past 4 years have seen unusually high investment in dwellings.

You say that’s “not what the data are saying” but you provide no evidence to back it up.  Please, tell us more about this investment boom and where exactly we have been investing if not in bricks and mortar.  Have you not noticed the forests of new apartment buildings in every suburb?

Gittins (as usual) disagrees with you:

“Investment in new housing and renovations was running at up to 2 percentage points of gross domestic product above its long-term average.”


Posted by .(JavaScript must be enabled to view this email address)  on  06/06  at  02:20 PM

Dwelling investment is one of the most cyclical components of GDP, so the fact that it is above or below trend at any given time is not surprising.  We haven’t seen anything in housing that’s inconsistent with these normal cyclical dynamics.

Posted by skirchner  on  06/06  at  02:33 PM

Ok, so you’re saying there has been surge in dwelling investment over the past 4 years but nothing extraordinary?  What about the growth in credit (and more particularly housing credit) over the past decade.  Is that not extraordinary?

Chart of credit aggregates:

You did say there had been an “investment boom”.  I’m interested in where these investment dollars have gone if not bricks and mortar.  I can’t see any evidence that equipment investment has grown.

Posted by .(JavaScript must be enabled to view this email address)  on  06/06  at  03:15 PM

The national accounts break down capital formation into its various components.  For Q1 05, plant & equipment spending is up 15.2% y/y compared to dwelling investment which is down 3.8% y/y.  Again, I wouldn’t read too much into data for any one year, but the popular belief that we are only investing in housing is not supported.  The pick up in credit growth is partly attributable to innovative new financial products like home equity lending, low doc loans, etc.

Posted by skirchner  on  06/06  at  04:17 PM

Yes but the housing boom peaked in late 2003, so of course the last 12 months is going to show a decline in dwelling investment.  Sheesh, you have a go at me for picking Dec ‘00 -> Dec ‘04 and then you pluck out this period as ‘evidence’ ?!

Look at the data for investment over the course of the housing boom from (say) 1997 through to the peak (around Sept 2003).  It shows strong growth in dwelling investment with no change in equipment investment.

Lemme do a quick calculation using data from RBA spreadsheet; in Mar 97 quarter dwelling investment was 4.5% of GDP, equipment investment was 6.6% of GDP.  Equipment investment has remained pretty static since then, but dwelling investment topped out at around 6.9% of GDP in Jun 2004.

Another question: If we’ve had this huge growth in housing credit, where did we spend it?

Posted by .(JavaScript must be enabled to view this email address)  on  06/06  at  04:41 PM

There is more to business investment than just plant & equipment: there is also non-dwelling and engineering construction; intangibles etc.  Probably better to use the ABS data if you want the full picture, but remember the dwelling and other investment cycles are not always in sync, so their shares of GDP will vary.  Spending of housing credit will get picked-up in the expenditure components of the national accounts, so it’s all there in the data.

Posted by skirchner  on  06/06  at  04:55 PM

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