Housing grief

I copped a bit of grief for suggesting that the decline in the growth rate for housing credit was a step towards national economic sustainability. Apparently I was supposed to think it was ugly. I agree, going forward, it probably means a lower rate of GDP growth (and therefore an increase in the unemployment rate).

But ugly? More like necessary. My version of ugly is the following. In the 30 years prior to the GFC, Australia's private debt grew from around 40 per cent of GDP to 150 per cent. 

The proportion of this private debt that went to productive business purposes fell from more than 60 per cent to less 40 per cent of the total. Housing credit has grown from a touch over 20 per cent to almost 60 per cent.

In anyone's books, it's a bubble. The best we can hope for is a slow, well-managed deflation. But there is a risk that the structural change in the marginal propensity to save/consume we have seen post GFC could blossom into a precautionary self-reinforcing downwards spiral in housing prices and the demand for housing credit.

On the other hand, if the housing credit growth rate returned to where it was for the 30 years prior to the GFC, GDP growth would pick up and unemployment would fall ... for a period ... if we are lucky. But the bubble would still  be inflating. And the ultimate deflation would be all the more dramatic.

A cut to the RBA target rate

Today we saw the third day when the one month overnight indexed swaps rate moved lower than the interbank rate (from RBA table f01).

Why is this happening? Well, it looks like the market is starting to anticipate a cut in the RBA target rate. To be fair, the market is not yet convinced about a rate cut, but in the last couple of days sentiment has moved a little towards believing a cut more likely than earlier thought. If I was to translate the prospect for a cut into probability terms, it looks like we are sitting at around a one third chance of a rate cut.

However, also to be fair, this growing spread is not a reliable predictor of whether or not the RBA will cut its target rate. Last month (and numerous times prior to that) the market anticipated in vain a cut to the target rate.

Credit Aggregates for February

The RBA has released its data on credit aggregates for February. The growth in credit continues at its much lower post-GFC rate.

Productivity growth

Productivity growth - or more specifically labour productivity growth - is the growth in output per worker. Krugman once famously said:

Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. World War II veterans came home to an economy that doubled its productivity over the next 25 years; as a result, they found themselves achieving living standards their parents had never imagined. Vietnam veterans came home to an economy that raised its productivity less than 10 percent in 15 years; as a result, they found themselves living no better - and in many cases worse - than their parents.

So how is Australia doing? Well, perhaps not so good.  Over the past decade our labour productivity growth has been slowing. My back of the envelope calculations follow. They are drawn from the ABS National Accounts and the ABS labour force statistics. To see past the increasing number of part-time workers, I have looked at GDP per hour worked rather than GDP per worker.

In the next chart with the 41-term Henderson moving average - effectively a decadal moving average - we can see the underlying decline in the labour productivity growth rate. In the last decade it has declined from an average of 3.3 per cent per year in the late 1990s to (perhaps) zero.

Another way to think of labour productivity is to examine GDP per dollar paid in wages. While it was difficult to find whole of economy data, data in respect of the non-farm part of the economy was available from the ABS analytical series on the national accounts. The data tells a story with some differences - not so much one of decline over the past decade - but of productivity growth that has been close to zero since the early 1990s. 

It is arguable that the latter charts tell us that workers have continued to share in the growth of the economy.

However, if productivity growth is almost everything in the long run, the earlier charts alert us to a significant underlying problem in the Australian economy.

Is it a good time for a fixed rate home loan?

The ASX target rate tracker is not currently suggesting an immediate drop in official interest rates (highlighted in grey in the above chart).

Note: Chart data from Reserve Bank Of Australia, table f05.

Note: I am not a financial adviser.

ABS Labour Force Quarterly for February

Okay, so I am a couple of days late, but here is a quick recap from the ABS Labour Force Quarterly for February. The key changes over the past three months ...

The key changes over the pest 12 months ...

The tourism downturn is evident in the data ...

The decline in the agriculture sector appears arrested ...

Construction appears to be turning down ...

Employment in the education sector is plateauing ...

Are we seeing the start of a downturn in financial and insurance services?

Health care and social services (our largest employment sector) continues its fairly consistent and relentless growth (well in trend terms) ...

Employment in the manufacturing sector may be turning a corner, but it is well down on its historical past

Conversely, employment in the mining sector is skyrocketing ...

Retail employment is in a downturn phase ...

And employment in the transport postal and warehousing sector is turning down ...

Okun

Like ricardian ambivalence I have wondered about Australia's fairly resilient unemployment rate given the anemic GDP growth it experienced after the GFC. The average annual through the year (TTY) GDP growth to 2008 was 3.7 per cent per year. From 2010 it has been 2.3 per cent.

Using Okun's rule, I had expected the unemployment rate to continue growing by about half a percentage point each year over 2010 and 2011.

However, notwithstanding the small bump in the unemployment rate in mid 2011, the trend from early 2010 to early 2012 has been flat to downwards (by around 0.3 percentage points) Not upwards and not quite what Okun's rule predicted.

My solution to the problem was to question the linear regression. A localised regression yields a prediction closer to the experienced near zero growth in the unemployment rate we have seen from 2010.

Dating Australian Recessions

When was Australia in recession? The simple (some would say simplistic) answer is when it experienced two quarters of negative growth. The more nuanced answer includes a substantial decline in spending over a number of months with an associated rise in the unemployment rate (of at least 1.5 per percentage points).

Why do I want to know? Well, I wanted to add a background shading to graphs to indicate recessions (as well as slowdowns that are not of a sufficient magnitude to be called a recession). An example follows in respect of the unemployment rate.

I thought Google would answer the question. But it was not immediately obvious. So beginning with the notion of two quarters of negative growth in real GDP, I have had a tilt at marking out Australia’s recessions since 1960. I have also used the notion of two consecutive quarter decline in real GDP per capita to mark out periods of economic slowness (especially when associated with a bump in the unemployment rate).

Looking at the ABS data some issues became obvious. The original series shows huge seasonality. The December quarter is typically up between eight and twelve percentage points on the previous September quarter. The March quarter typically evidences an even larger absolute contraction than the growth experienced in the December quarter. For this reason, when looking for recessions, most focus on the seasonally adjusted series.

But even this can be tricky.  How should zero growth quarters be treated? How should a small growth quarter be treated when it occurs in the middle of a series of contracting quarters?

Being a little capricious with the data, as a first cut, I have decided on the following periods as marking out Australian recessions and slowdowns. 

Recessions:

Start	Finish
1 Apr 1961	30 Sep 1961
1 Oct 1971	31 Mar 1972
1 Jan 1974	30 Jun 1974
1 Jul 1975	31 Dec 1975
1 Jul 1977	31 Dec 1977
1 Oct 1981	30 Jun 1983
1 Oct 1990	30 Jun 1991

Economic slowdowns:

Start	Finish
1 Oct 1960	30 Sep 1961
1 Oct 1971	31 Mar 1972
1 Jan 1974	30 Jun 1974
1 Jul 1975	31 Dec 1975
1 Jul 1977	31 Dec 1977
1 Oct 1981	30 Jun 1983
1 Jan 1986	30 Jun 1986
1 Oct 1989	31 Dec 1991
1 Jul 2000	31 Dec 2000
1 Jan 2006	30 Jun 2006
1 Apr 2008	30 Jun 2009

Comments welcome!