Australians aren’t whinging about the economy – they are reflecting their reality

May 7, 2012

Australian Economy

I have long been advocating that there is a disconnect between policy makers and the media and what is happening in the real Australian economy in this GFC influenced world. I’m neither the first nor the last but as we head toward and Australian Austerity style Federal Budget and I hear people trotting out the idea that Australian’s should be grateful for their relative economic sunshine I have to admit I get their point but I think they just don’t live in the real world. An article I saw from Peter Hartcher on Saturday in the Fairfax Press reinforced once again the disconnect between Politicians, the Press, other insiders and Real Australia – the hoi polloi.

Hartcher’s article was titled “Whingers in wonderland” so you get the angle straight away that we, your average Australian just don’t get it – you are lucky to be living in wonderland.

Hartcher’s article starts in the following manner,

Politicians have only themselves to blame if Australians give them no credit for the stellar performance of the economy.

Stellar – yes Stellar. Australia’s economic performance is stellar – that’s why the RBA has cut rates 1% and is expected to cut around another 0.75% to 1% more.

I was bit miffed when I read this just a day after I wrote my piece about a possible recession and a day after the RBA downgraded its growth forecast In its Quarterly Statement on Monetary Policy. Sure the RBA said that the mining economy was doing ok, again – but it also said the non-mining economy continues to struggle. So when I read one of Australia’s foremost political commentators telling my fellow, debt laden Australians, to just suck it up and be happy I had to respond on behalf of average Australians.

I would encourage you to have a read of the Hartcher article but before you form your judgement then go and read the original Wall Street Journal article he quotes and then form your judgement because in cherry picking comments from GE about the merits in their relative businesses in Australia and China I think that Hartcher either misrepresents or misunderstands why they prefer Australia and crucially for the whingeing hoi polloi of his title completely misses the point as to why the boom isn’t being felt everywhere in the Australian economy.

Hartchers says,

The Wall Street Journal ran a startling story this week about the US-based General Electric, one of the world’s biggest and most profitable multinationals. Its opening line: “For General Electric Co., Australia is the new China.”
What could it possibly mean? “The continent of 22 million people is set to generate more revenue for the industrial conglomerate this year than will the Middle Kingdom, with 1.3 billion,” the paper reported.
It wasn’t that the US-based firm was doing badly in China or giving up on the place. Indeed, it sold $US5.7 billion worth of products and services there last year.

But GE did even better in Australia, where it reported revenues of $US5.8 billion. And it expects its Australian business to outstrip its Chinese one again this year

For Australians reading this, it’s a through-the-looking glass experience, a giddy moment of cognitive dissonance. It upends our verities – we are told again and again that China is the country we rely on for our prosperity.

So how could the periphery of the Chinese growth zone be more profitable than its centre?
“Australia is in an extraordinarily fortunate position,” GE’s chief executive in Australia, Steve Sargent, tells the Herald. “Developing Asia is the growth engine of the world economy, but Australia is its fuel.

So to summarise – GE wants to do business here because Asia might be the growth engine but we are it’s fuel. Entirely reasonable I’d say.

But the Wall Street Journal article goes further. It says,

The shift stems in part from Chief Executive Jeff Immelt’s shuffling of the company’s business lines to emphasize energy. But it also reflects a significant rethinking of China’s value for GE, which, after years of missed targets and slow growth in the country, has turned its attention to resource-rich locations that have friendlier rules for investing and fewer national champions as rivals.

Mmmm….that is shorthand for Australia has less competition to GE and less inclination to protect its national interest. Indeed, the WSJ quotes Jeff Immelt who expressly says this,

“These places have unbelievable opportunities for the U.S.,” Mr. Immelt said at a Stanford University conference this year. “China is big, but it is hard. These places are equally big, but they are not quite as hard.”

So, in trying to serve its shareholders – as is there want – the management of GE is looking for easier markets and greater profit potential.

This is where I think Hartcher goes horribly wrong with his “through the looking glass” quip which might make nice copy but it is so off the mark and out of context it’s not funny. GE’s love affair with Australia is about profit first and foremost so when Hartcher then quotes GE’s country head for Australia telling us how good we’ve got it I confess to thinking that this just reinforces the disconnect between what we might call the elites and the real Australia.

I’m not trying for the politics of division here I just thing that conventional political and economic thinking just doesn’t get thee reality of the weight the debt burden, and current falling house prices,  is placing on Australian households psychologically and how those thoughts are influencing behaviours at an individual and aggregate level. It’s my hobby-horse I know but I’ve been right on this economy and the outlook for some time now just using this simple metric.

This is the point about the disconnect between the political and policy making classes and your average Australian. Australians know there’s a boom on in mining but for the most part they have not been benefitting from it. I don’t thing they are being envious, I think they are being pragmatic – that is, they are just getting on with their lot while those involved in mining get on with theirs. Simple as that.  It’s not about how lucky we are or that we’ve lucky to have our economy and not other more moribund economies around the world.

Australia is doing well in aggregate but families don’t live in the aggregate world they live in the individual and Australians and Australian families continue to feel the pressure of too much debt and a job market that appears to be much more unstable than the aggregate unemployment rate around 5% would suggest – the RBA highlighted this in last week’s SMP.

The paradox of thrift and the tragedy of the commons both tell us it’s the individual that make the aggregate. The RBA has clearly changed it’s thinking on the economy and are doing their darndest to get the economy on an even keel once more. So enough with lecturing from the privileged few and the political and policy making classes – the sooner they recognise the trouble we are in the sooner we’ll get it fixed.

Have a great day

Gregory McKenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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One Comment on “Australians aren’t whinging about the economy – they are reflecting their reality”

  1. Iron Horse Says:

    Interesting then that GE are now rationailising their branch structure across at least three states by closing non-performing branches and/or consolidating branches. I would have thought this would have a negative impact on their growth forecast even though it may help improve profitability….


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