Risk to SEQ economy from likely downswing in residential construction, as market absorbs huge supply shock

Posted on January 3, 2017 by Gene Tunny

John McCarthy had a very good opinion piece in yesterday’s Courier-Mail on the “Sorry tale of the great Queensland divide”, in which he contrasted SEQ’s relatively strong economic performance with weakness in many regions, an issue which I frequently commented on last year. John observed:

“Right now, Brisbane is booming. It really doesn’t get much better for the capital…Brisbane and the southeast have dragged the state into a third straight quarter of increased economic activity.

But rural and regional Queensland is a disaster. That’s not hyperbole, it’s real, and it’s due to a combination of factors, ranging from the lasting effects of the drought to commodity prices, poor infrastructure development, and the collapse of mining investment.”

SEQ’s relatively strong performance in recent years has been due in part to a residential construction boom, but this is unlikely to continue given the already huge additions to housing supply we have seen.

The HIA has forecast that residential construction activity will decline in Australia in the next few years, after having peaked in 2015-16 (see MacroBusiness coverage from last August). Residential construction has already started detracting from economic growth in Victoria, and NSW and Queensland may soon follow (see chart below).

dwelling_investment_sep16

Certainly, building approvals in Queensland for units have fallen in recent months, while approvals for detached houses have remained stable at around 2,000 per month (see chart below and also Pete Faulkner’s post Building approvals down on units).

building_approvals_oct16

Queensland Treasury itself flagged the risk to residential dwelling investment on p. 19 of the Mid Year Fiscal and Economic Review 2016-17 released last month:

“The current momentum should see dwelling investment continue to grow at a strong pace in 2016-17. However, the high number of apartments being completed in South East Queensland, as well as tightening in lending practices, may limit growth in dwelling investment in 2017-18 and beyond.”

The adjustment of SEQ’s property market and building construction industry to the supply shock will be an important economic development to watch over 2017. Recent data show the adjustment has already begun. CoreLogic’s most recent Hedonic Home Value Index report showed a decline of 0.9 percent in the value of units in Brisbane over the twelve months to November last year (see chart below).

unit_prices_nov16

The decline in the value of Brisbane units is unsurprising given the very large increases in stock on the market, particularly in inner city Brisbane, as new apartment buildings have been developed (see chart below based on data reported in the January issue of Your Investment Property magazine).

stock_on_market

It will be important to continue to monitor these trends over 2017, as I suspect there is much more market adjustment to come.

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2016 brought big surprises, but a comparison to 1848 seems overblown

Posted on December 31, 2016 by Gene Tunny

In his thought-provoking review of the year of Trump and Brexit (After the revolt comes uncertainty), the Weekend Australian’s Foreign Editor Greg Sheridan observes:

“…2016 may well be seen by historians as a year of fundamental pivot, of a change of direction on par with other great pivot points of global history. Perhaps 2016 calls most to mind the year of European revolutions in 1848.”

Sheridan is right to highlight the uncertainty we face given recent events, but comparing 2016, which had some surprising results in democratic elections, to a year in which there were actual revolutions in western nations, with barricades and street fighting in Paris, Berlin and Dresden, seems a little overblown.

la_oleada_revolucionaria_de_1848

Can we really compare 2016 to 1848 ?

We have no idea how the Trump administration will perform and whether Trump will remain popular and stay for two terms. Trump made some extraordinary election promises, such as his large corporate tax cut, which are expected to increase the US federal deficit and the already very high level of national debt. In turn, a debt blowout may force unpopular cuts in programs and services. If Trump makes the large policy changes he has suggested, he runs the risk of not getting a second term.

Brexit, expected in 2019, will certainly result in long-term impacts to the British and European economies, but we remain unsure exactly what they will be, as the new trade, investment and migration arrangements still need to be negotiated. Of course, much will depend on what happens to the EU, the long-term viability of which is under threat from nationalist movements, and we have to see what the French, Dutch and German elections will bring next year. After 2016, we know it is unwise to speculate on election outcomes.

All things considered, it is too early to compare 2016 to 1848.

Let us remain optimistic and look forward to an exciting and interesting 2017!

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Recommended holiday reading: The Man Who Knew

Posted on December 22, 2016 by Gene Tunny

The best economics and finance book of 2016 is undoubtedly Sebastian Mallaby’s masterful biography of former Federal Reserve Chairman Alan Greenspan, The Man Who Knew. Greenspan was the man who knew that superficially healthy economies, with steady economic growth and low-inflation, could nonetheless be building up unhealthy imbalances, such as speculative asset price bubbles. But he failed to avert the huge US housing bubble and financial market excess that ended so spectacularly in 2008. Greenspan’s reputation as the all-time-great central banker was shattered by the financial crisis. Mallaby concludes that Greenspan’s mistake was taking the path of least resistance:

“Controlling asset prices and leverage was hard; fighting inflation was easier. At a time when deregulation and globalization were bringing down prices anyway, and when Paul Volcker had established the legitimacy of an inflation-fighting Fed, Greenspan chose the path of least resistance.”

Mallaby makes a strong case that Greenspan should have seen it all coming, referring to previous statements from Greenspan in lectures he gave as an Ayn Rand devotee in the sixties, his doctoral dissertation, and numerous speeches and testimonies—recall “irrational exuberance”.

The book is not wholly unfavourable to Greenspan, however. It details Greenspan’s role,  along with US Treasury Secretary Robert Rubin and his deputy Larry Summers, in the so-called Committee to Save the World, which helped ameliorate financial crises associated with Mexico and Korea in the nineties.

The book includes a wealth of interesting detail on Greenspan’s private life, including his relationships with Ayn Rand (an intellectual relationship) and Barbara Walters (a romantic relationship), among others. It is also informative on Greenspan’s involvement in Republican Party politics in the 1970s, including his bid, in alliance with Henry Kissinger, to have former President Gerald Ford run as the Vice Presidential candidate with Ronald Reagan in 1980. Ford would have been almost a co-President, Kissinger would have been returned as Secretary of State, and Greenspan would have been Treasury Secretary. This very odd proposal almost became a reality, with Gerald Ford only losing his nerve at the last minute, forcing Reagan to invite George Bush senior on to the ticket.

This book would make an excellent Christmas present for anyone interested in economics and finance. Copies are available at Folio Books on Edward St in Brisbane and most likely at other good bookstores.

manwhoknewcover

700+ pages of reading pleasure for anyone interested in economics and financial markets

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Victoria still beating Queensland in interstate migration & population growth

Posted on December 18, 2016 by Gene Tunny

Since late 2012, Queensland has been losing people to Victoria, a reversal of the historically positive net flow of people from Victoria to Queensland (see chart below based on the latest ABS population estimates published Thursday last week). While the net loss to Victoria from Queensland has only been around 1,000 people each year, it is at such variance with the historical record that it warrants some concern.

demostats_jun16_chart0

Queensland historically led Australia in net interstate migration, reflecting the attractiveness of our climate, lifestyle and economic opportunities, but now Victoria is on top (see chart below). While Queensland gained 11,600 people from other States and Territories in 2015-16, largely from NSW, Victoria gained 16,700 people, including around 1,000 people from Queensland.

demostats_jun16_chart1

Victoria also leads Australia in population growth, while Queensland is only growing at around the national average growth rate (see chart below).

demostats_jun16_chart2

As I have commented previously, I think Victoria has surged ahead partly because of large improvements in the liveability of Melbourne relative to South-East Queensland. SEQ’s decline in relative liveability was largely due to our failure to properly manage the population surge we experienced in the 1990s and early 2000s (see this QEW post from March). Also, the fact Queensland has a relatively less diverse economy, heavily dependent on mining, has not helped. In recent years, Queensland has unfortunately not been generating the full-time jobs that would attract people from other States and prevent Queenslanders from leaving (see chart below). Indeed, the number of full-time employed persons in Queensland declined in the twelve months to November by almost 12,000 or by 0.7 percent. Over the same period, the number of full-time employed persons in Victoria increased by around 74,000 or by 3.7 percent.

demostats_jun16_chart3

Thankfully, interstate migration to Queensland has started to recover from the very low levels of 2014-15 (as indicated in the first chart above), but it is still well below levels seen in the 1990s and early 2000s. I expect it will recover further, as the Queensland economy appears set to perform better than other States and Territories over 2017, but I have no doubt we will continue to lose many talented Queenslanders to Victoria, given its very attractive lifestyle and career opportunities.

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Should Queensland legalise recreational marijuana use?

Posted on December 16, 2016 by Gene Tunny

My friend and fellow economist Dr Stephen Thornton of Bluegreen Economics has released a report advocating for the legalisation of marijuana for recreational use in Queensland. While the Queensland Parliament has recently passed a law allowing medicinal marijuana use, we could go further and allow its recreational use, as is done in Colorado and Massachusetts, for example. Stephen’s report is timely, following the news earlier this week that Canada is likely to legalise cannabis for recreational use, with some regulations on production and distribution, in the next few years (see this Globe and Mail article).

Stephen provided me the following summary of his report, which I found very interesting reading:

…the Queensland government is likely to receive tax and fee revenue of around $90 million/year in the medium term (three to five years) and achieve significant savings in terms of decreased police, court and prison costs, with new jobs created in a new legalised cannabis industry.

Cannabis consumers would no longer have to purchase from sometimes unscrupulous dealers operating in the black market, with the added benefits of no longer being fined and imprisoned with the associated police record and social stigma limiting their future job prospects. As well, consumers would also be confident of what they were purchasing as products would be tested and labelled for increased safety. They would also benefit as prices decreased over time in a competitive, market environment.

The community would also benefit, largely through a decrease in crime-related activities like break and enter and property theft crimes as the price of cannabis fell and people purchased product legally and more affordably. They would also benefit from government being able to spend more in other areas and/or being able to pay down government debt.

While there would likely be some additional costs to the state government and some consumers in terms of a small increase in mental and physical health issues associated with new consumers or existing consumers who increase their usage, these could be mitigated by a public education campaign.

bge_report_cannabis_cover

Is it time to legalise recreational cannabis use in Queensland?

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Higher royalties improve Qld budget bottom line, but work still needed on budget repair

Posted on December 14, 2016 by Gene Tunny

As we have been expecting for some time, higher coal prices and thus royalties (see chart below) have translated into a much improved State Budget balance, with the Queensland Treasury now forecasting the biggest operating surplus ($2 billion) in a decade. The surge in coal royalties is extraordinary, up $1.5 billion over the Budget-time forecast for 2016-17.

coal_royalties_myfer_1617

The improved operating balance is welcome, but the State Government still has a fiscal deficit of $1 billion (taking into account capital spending), meaning it continues to borrow money and add to State debt, even though we need to reduce State debt if we are to regain our AAA credit rating.

In its editorial today, the Courier-Mail rightly points out the need for rigorous cost-benefit analysis of regional job creation schemes, and the need to restrain the growth of the public service, which has been expanding at a rapid rate under the current Government. The Editor also makes the following point:

“While the Government likes to make much of its capital works program, the reality is that real spending on capital purchases is declining or (depending on the measure used) at best flatlining at a time when Queensland needs major pieces of investment to underwrite future economic growth.”

The Editor’s point about capital purchases flat-lining is correct (see chart below). As I have noted previously, it was unwise for the Government to rule out privatisations of State assets, which could have allowed it to invest in new assets without increasing debt. I expect the debate about asset recycling to resume in the new year.

capital_purchases_myfer_2016_17

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Guest post from Paul McGuire: Some Investment Tips – dos and don’ts

Posted on December 11, 2016 by Gene Tunny

I am delighted to publish this guest post from my friend and former colleague Paul McGuire, who has had a diverse career as a professional economist, including positions in the Commonwealth Treasury, OECD, Australian Government ministerial offices and Queensland Government agencies. His career has taken him all around the world, to Paris, the Cook Islands, Canberra and Brisbane, among other places. The views expressed in this article are Paul’s and should not necessarily be attributed to me. GT

Some Investment Tips – dos and don’ts

by Paul McGuire

As an economist I am often asked for investment advice by friends and relatives. Accordingly, I have developed some tips based on my own research in managing my investments and those of my family. They have also benefited from comments and suggestions from a number of friends and colleagues. They are intended to be general information only and do not constitute professional advice.

1. Pay down your loan on your principal place of residence

If you have a home loan, the interest on your home loan is not tax deductible. Hence you are paying your interest from your after tax income.

If you are paying 5% interest on your home loan and your marginal tax rate is 34.5% (i.e. your taxable income is between $37,000 and $87,000 from 2016-17), paying down your home loan is equivalent to earning 7.6% before tax from an alternative investment.

If your marginal tax rate is 39% (i.e. your taxable income is between $87,000 and $180,000), paying down your home loan is equivalent to earning 8.2% before tax from an alternative investment.

If you know of a risk-free investment with guaranteed returns above 8.2% per year before tax please let me know and I will gladly invest in it.

You should also see if you can use an offset account for your day-to-day transactions. Any money in the account is offset against your home loan and directly reduces your interest payments.

Continue reading →

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Government right to rule out fiscal stimulus

Posted on December 11, 2016 by Gene Tunny

The ½ percent GDP contraction in September quarter that the ABS published last week has raised a lot of questions about the current state of the economy, and whether the Government should do more in terms of economic reform or fiscal stimulus.

Regarding fiscal stimulus, I agree with Finance Minister Mathias Cormann’s view reported in the Brisbane Times that it would be undesirable. It is very possible that the September quarter result was an aberration caused in part by volatile public sector capital expenditure numbers, and that there will be a bounce back in December quarter (see the decomposition of GDP growth in Queensland Treasury’s latest National Accounts brief). That said, it is clear the Australian economy is not as healthy as we thought it was earlier in the year, and the outlook for business investment is concerning.

Fiscal stimulus has historically proven to be ineffective or counter-productive in stabilising the economy. There are at least two major problems with fiscal stimulus.

  • First, there are recognition, decision and implementation lags, which mean that fiscal stimulus will likely impact an economy after the need for it has passed, risking an over-heating economy on the upswing.
  • Second, by increasing government borrowing, fiscal stimulus can put upward pressure on interest rates, attracting foreign capital into the country, leading to a currency appreciation, discouraging exports and encouraging imports (i.e. impacts that act in a direction contrary to the fiscal stimulus).

The second point is the well-known critique derived from the Mundell-Fleming model, which Tony Makin has effectively used in critiquing the Rudd Government’s fiscal stimulus packages in response to the financial crisis, most recently in a paper commissioned by the Treasury. Makin is correct the National Accounts data show that what appears to have saved the Australian economy at the time of the crisis was actually a depreciation of the currency in 2008, related to interest rate cuts by the RBA, and a boost in net exports, rather than the fiscal stimulus.

I should note that while I largely agree with Makin’s ex post analysis, I was working in the Treasury in 2008-09, and at the time I thought fiscal stimulus was warranted given the expectation that Australia would receive a huge adverse shock from the global financial crisis. Treasury officials thought that the crisis was of such an exceptional nature that it warranted it a strong and timely response. Treasury was well aware of the traditional problems in implementing fiscal stimulus packages, and Treasury Secretary Ken Henry reflected that wisdom in his famous advice to the Government that it should “go hard, go early and go to households”. I recall I had some reservations about the size of the second stimulus package in February 2009, but I had no doubt a stimulus package was necessary based on the economic outlook at the time. In my view, given the extraordinary circumstances at the time of the financial crisis, fiscal stimulus was appropriate ex ante, although it now seems to have been unnecessary and undesirable ex post.

Finally, returning to the September quarter National Accounts figures, Queenslanders should take comfort from the fact that Queensland’s economy appears not to have contracted, registering a slight increase in State Final Demand in the quarter. Encouragingly, private sector capital investment is increasing, with non-dwelling construction activity starting to grown again after its steep decline at the end of the mining boom (see charts below).

na_sep16_chart1

na_sep16_chart2

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Why the Adani mega mine is welcome news in Townsville

Posted on December 6, 2016 by Gene Tunny

It is welcome news to the local community that Adani will base its Carmichael coal mine headquarters in Townsville , which has struggled with job losses and high unemployment over the last couple of years. The Townsville Bulletin reports:

“Townsville will be at the centre of the $21 billion development, tipped to become the biggest mine in Australia, and function as the regional headquarters for operations across the North.

The Bulletin understands this arrangement includes setting up the city as a major FIFO hub housing about 1500 workers who will be regularly flown to the mine.

Further employment opportunities will be created through a cutting-edge remote operations centre where driverless machinery and mining technology will be run from Townsville.

As many as 500 white-collar jobs are also expected to be announced and Adani has committed to not using workers with 457 visas.”

Undeniably this is fantastic news for the Townsville region, although I do not expect the project will fully make up for job losses in recent times. Nonetheless, it will inject some much needed money and confidence into the region.

Townsville’s economy has certainly been struggling in recent times. Over the twelve months to October, the Townsville regional unemployment rate averaged 10.6 percent, compared with a State average of 6.1 percent (see Queensland Treasury’s regional labour force brief). And the Townsville region has lost in the order of 10,000 jobs (first chart below) with an associated collapse in the employment-population ratio (second chart below).

townsville_employment_oct16

empl_pop_ratio_townsville_oct16

Posted in Mining, North Queensland, Townsville, Uncategorized | Tagged , , , , , , , , , , | 3 Comments

US recovery on track, while Australian economists wait anxiously for latest National Accounts

Posted on December 4, 2016 by Gene Tunny

The latest US jobs data show an economy that is growing quite nicely, with 178,000 new jobs over the last month, and with unemployment falling to 4.6%, its lowest rate since the financial crisis (see chart below). However, the market had expected slightly stronger growth, and the drop in the unemployment rate from 4.9% to 4.6% was due in large part to a drop in the participation rate (see US News report and FT coverage). That said, overall the data are consistent with a healthy US economy, and thus it still appears extremely likely the US Federal Reserve will increase the Federal Funds rate this month from its current target of 0.25-0.5 percent.

us_urate_nov16

Although Australia will benefit to some extent from US economic growth, particularly through its flow-on effects to China, there are nonetheless concerns about the current economic outlook in Australia. The new capital expenditure data published by the ABS last week were worse than expected, with weakness outside of mining (see chart below), and the September quarter GDP growth figure to be published this Wednesday may well be negative (see Peter Martin’s SMH article from last Friday for an excellent overview). It is disappointing that the Australian economy appears to have lost momentum in the September quarter, as it appeared set for a good 2016 in its first half.

capex_sep16

Given low inflation and wages growth (see chart below), and the possibility of negative GDP growth, the RBA Board may end up having to cut the cash rate (currently at 1.5%) in 2017. While the market is overwhelmingly not expecting a cash rate cut when the RBA Board meets this Tuesday (see ASX RBA rate indicator), and the OECD has urged the RBA to increase interest rates to deal with the housing bubble (see Jacob Greber’s AFR article from last weekend), if the September quarter GDP figure released Wednesday is a shocker, the outlook for interest rates could turn around.

wages_oct16

Obviously a national slowdown would not be good news for Queensland. It would be very disappointing, as we have had quite a bit of positive economic news recently, including:

  • a fall in the unemployment rate (see chart below), although there is a lot of concern about the reliability of the ABS figures (see my QEW post) and Townsville remains in big trouble (see Pete Faulkner’s latest post on NQ & FNQ labour markets);
  • recovery in agriculture associated with better rainfall which, among other things, has led to a bumper wheat crop (see Qld Country Life coverage);
  • a strong tourism sector, with 11% growth p.a. in international visitors (now 2.5M p.a.) and expenditure (now over $5BN p.a.), driven by strong growth in visitors from China, up 30% in 2015-16, and Japan, up 21% in 2015-16 (see TEQ’s very useful International Tourism Snapshot); and
  • higher coal prices which are substantially improving the budget bottom line, and may allow the State Government to boost infrastructure spending, which would be much appreciated in regions such as Townsville and outback Queensland that have been suffering at the end of the mining boom.

Recently, the Queensland economy had shown signs of pulling out of its previously lacklustre state, so let us hope we avoid a national slowdown that would hold back Queensland as well.

urate_oct16

Posted in Agriculture, Macroeconomy, Mining, North Queensland, Townsville, Uncategorized | Tagged , , , , , , , , , , , , , , , , , | 2 Comments