Geopolitics and doing business in Hong Kong and China.
Australian politicians and government statisticians paint a picture of optimism in the first case and caution in the latter. One can see the role of politicians to be positive and for the person in the street to carry on regardless, doing the best they can. But, if you look at the High Street of any city or town in Australia, and other developed economies, you will see that not all is well.
The Australian Financia Review published the results of the Harvard Kennedy School’s Centre for International Development which showed, amongst other things, Australia languishing at 93rd in terms of economic complexity – below Morocco, Senegal and Uganda! What this means is that the complacency around our mineral exports has meant less development of other products and services that build a more complex economy.
Notable commentators like Shane Oliver also point to continuing economic growth for another 6-12months underpinning share markets, with, implicitly, riskier times ahead. Australian unemployment statistics are around 5.5%, but the underemployment rate is probably a concern at around 6% which means that there is a significant employment issue arising. But, there are other ways to observe what might be happening in the economy given that all statistics lag events and as does economic analysis.
For example, there is plenty of evidence that the retail sector is experiencing a difficult time and there are plenty of professionally skilled people looking for work or setting up their own businesses. I am not sure that the unemployment rate reflects what is happening in the economy – I know a number of people who have set up ‘businesses’ that take them out of the count of employment statistics, but for whom the experience is bordering on ‘self-unemployment’ rather than productive work.
Many, who may have received redundancy or have savings, are drawing these down while they develop their business. This is a natural part of the investment cycle and I wonder whether this is part of the reason why professional services are seen as one of the few sectors in Australia and internationally to be growing.
What has prompted me to think about this more is a conversation I had with my local barber when we got chatting, as you do, about the number of local shops closing. He pointed to the local rents typically around $3-4,500 per week and that it was a wonder any business stayed open. The local delicatessen and a bakers shop, both with at least three decades of trading history, had closed – as he said “you’ve got to sell a lot of 80 cent buns a week just to pay the rent!”
He is right and there is an increasing disconnect with the rents demanded and the ability to run a viable business. Thinking of my native UK, where all high streets are full of multiple chain store groups, a private shop is a rarity, I wonder whether that is how things will go in Australia? There is already evidence of this as major supermarket chains buy up property in order to consolidate this into a new major supermarket, which is bound to have an impact on other foodstuff retailers. To be balanced, this may also improve footfall for other businesses, but change is clearly afoot.
My trusty hair cutter also noted that the deli that closed had two shop units with apartments above and had sold in March for around $9 million and had remained empty ever since – what sort of investment is that, he asked. Indeed.
In my local area, on the lower north shore of Sydney, which is one of the country’s more prosperous areas, there are an increasing number of retail shops and offices available to lease. A couple of years ago these would have turned over quickly and re-let, but since the beginning of 2019 one can see that the number available is increasing suggesting a reduction in demand due to well reported on-line competition and an underlying slowing in the economy.
A few years ago, the Lowy family got out of Westfield. Now, these guys are clear eyed operators and if they thought that exposure to commercial property was worth reducing, it makes you wonder about the future for that class of investment for the many smaller investors who have acquired small commercial leases. If the retail and office market in a well healed Sydney suburb is struggling, what chance those in locations that have lower average incomes and economic challenges like country Australia?
The more obvious signs of ‘For Lease’ that can be increasingly seen across our cities and towns is a concern, but of course, there are also wider employment implications in these closures that also impact consumer spending. People appear to be saving more – it’s encouraging to see how individual households can quickly work out how they should manage their budget in the face of real and perceived uncertainty. The concern here is that this is the other side of a reduction in consumer spending and clearly, the reversing multiplier effect is a characteristic of the current economy.
The government is crowing over the first surplus since the Howard government. As a political point score this is, perhaps, good, but should government focus on a budgetary management process as if it was a household budget? Germany has been doing this for years and they are facing a recession due largely to a reluctance on the part of government to spend its surplus, and the impact on its machine tools manufacturing as China slow down in part due to Trump’s tariff war.
Significant infrastructure investment is taking place in NSW and I believe that it is generally recognised that infrastructure investment is the key stimulus the economy needs, not just to improve spending overall, but as long term support to economic growth. With low cost money, why wouldn’t you invest in assets that will underpin future productivity and growth?
In the 1980’s I was a strong believer in the neo-liberal economic solution to the horror that was the UK economy in the 1970s. It made sense, then, to focus on monetary control and balanced budgets. But since the GFC all the indicators are turning south with the rest of the developed world seemingly about to join Japan with low growth and negative interest rates. This data points to what could become a deflationary environment with a longer-term impact on investment returns and asset prices.
The boom that the developed world has seen since the early 1970’s with higher inflation and increased property prices may have reached the tipping point. Since the Second World War the world economy has experienced growth and rising investment asset prices. This, to baby boomers, may seem the natural order of things, but historically, and over the very long term, low growth and low-inflationary and sometime deflationary price change has been the norm. Perhaps we are returning to that environment. Alan Koehler has an excellent article on this in a recent issue of Eureka Report that’s worth reading
In the late 19th century as economic growth became constrained within national borders of European countries, the need to overcome this was one factor that drove the development of ‘Charter Companies’ that colonised many regions of the world and Africa in particular. Since the 1960s and 70s the need for further economic growth saw the rise of consumer debt through credit cards and easy credit with the imperative to ‘have the lifestyle you deserve’ without waiting to save for it.
This rise of credit and debt not only augmented peoples’ access to consumption (even though in many cases their real incomes stagnated), but it built the basis for the securitised debt industry that has enabled some people to earn very large incomes. The trickle-down effect of this has been to the professions of lawyers, accountants and bankers in particular who were able to build relatively large wealth bases. The increasing asset prices in shares and property was the only way in which anyone with some capacity to save could participate in this wealth growth.
This spiralling, symbiotic economic environment certainly brought us the global financial crisis of 2008-9, but it is showing signs of strain. This is so even allowing for the fact that this nexus of economic activity affects us all.
There seems to be no easy way of trying to change this and maybe it is just a case of us learning to live with and better manage the inevitable crises that seem to occur, as economic activity and asset prices adjust to a lower for longer economic growth – the “Japanification” of the world economy. Bear in mind that China, with its robust growth, has yet to experience the adjusting economic crisis that is typical of the capitalist system. The social impact within China could be daunting, but the economic fallout for countries like Australia where commodity trade with China is some 40% of the exports, could be devastating.
I have thought for some time that the underlying cost basis of the global economy has been downward – in fact, the cost of nearly everything has reduced due to the growth in China, Vietnam and other Asian economies. They all have large populations – the middle class of India at around 300 million is a similar sized economy to the EU or USA. The key attribute is that wage costs are lower, and it seems to me that over the longer term the competitive impact of these growing economies is not only on the price of things, but on the price of work. I believe that the gig economy and lack lustre wage increases in the West also reflects this competition on labour cost. During my recent trips to China many people I met there complained about how hard it is to improve their income and that, on the street, the competitive nature of China can be seen in the number of delivery services that vie for your business.
So, if my street economIcs analysis holds and flat-lining wages is one cause of lack lustre consumer demand and economic growth, I asked my barber what business was like for him. “Steady. Everyone needs a haircut and even the unemployed need to look good for an interview.” This seems to be a safe industry and points to the need to be in a business that everyone needs.
For the rest of us all we can do is create the personal financial reserves we need to see us through difficult times, and for the government to start using its surplus to invest in infrastructure to fill the gap created by these personal savings. They also need to develop an industry policy that encourages savings away from non-productive property investment toward expanding the industrial and product diversity of Australia so that it can remain rich and become less dumb. Symbiosis, you see?