• The RBA has left the cash rate on hold – again. Considering the nosedive in commodity prices and mining investment, sluggish consumption growth and lacklustre employment figures, this comes as little surprise. Without the still bubbling housing market, the Australian economy would be in a right state. But a heated housing market does not make a strong economy, and loose monetary policy is creating an unstable foundation for the fast approaching new calendar year.

Behind the 8 Ball

• There have been fourteen meetings since the RBA last made a change to the cash rate. Over this time the global economy moved from ‘running a bit below average’ to showing ‘moderate’ growth and the Australian economy largely followed suit. Despite this rhetorical improvement, there are a number of issues still facing the Australian context that are evidently so serious that the RBA has lapsed into a state of paralysis.

• The RBA is rightfully concerned. Australia has not only arrived at a cross roads, but has largely lost its direction for which way to head next. This confusion comes from an unwillingness to recognize that mining, the very lifeblood of the last two decades of prosperity, is coming to an end.
• As the graph below shows, the commodity price index has been in marked decline since 2012 but considerably more so since the beginning of 2014. As Australia is a large commodity exporter, declines like this will have serious affects on national income. This means that the decline in prices is not only a concern for miners, who may very well be out of a job soon, but also for the non-mining sector.

Prosperity no more?

• Looking over current consumption data one would assume that the affect of the decline in the mining sector has already begun. As the graph below clearly shows, consumption growth has been in a long-term decline since 2008 with only a marginal improvement over 2012-13 before heading south again in 2014.

Reserve Army of Labour

• No doubt the employment situation is playing on the minds of consumers. Even without the ABS’s gaffe in the unemployment numbers in July and August, the situation for unemployment is not looking rosy. Indeed, employment has barely risen in half a year and the unemployment rate is now sitting at 6.2%: the highest level in 12 years.

• Indeed as Westpac senior economist Justin Smirk has said, if it were not for people dropping out of the hunt for work, the unemployment rate would have risen to 7.2% by now. Not only does this knock current consumer confidence levels but it also plays a prohibitive role in the decisions people are making for the future. Buy today or save for tomorrow? With all of this in mind, it is little wonder the RBA has stayed their decision.

Trade me, trade me, trade me

• Enter the latest report from McKinsey on competition in Australia. Much like the Deloitte report from earlier in the year, McKinsey recognizes that Australia has major structural challenges ahead. They argue that the way to rise out of this malaise is a greater focus on trade.
• This is not a new argument by any measure and resonates with David Ricardo’s seminal theory on comparative advantage, which simply states that countries should specialize in those goods they have abundance of resources in, and trade all that they do not require.
• The world has certainly moved on from the cloth and wine of Ricardo’s day, with the internet transforming how businesses interact and technology driving a lot of what is possible, however the simple premise of international trade remains one of the most powerful ideas governing the global economy.
• Even within a declining mining environment, McKinsey argues that Australia has the endowments of skills and resources to continue to compete and prosper in the global economy. However this will take concerted action and a willingness to shake up the status quo. They say that ‘The challenge for Australia is to create an agile, flexible economy capable of adapting to the inevitable rise in competition.’ This includes the need to create avenues for engagement with the new markets of Asia in agriculture, tourism, education, food manufacturing and niches of advanced manufacturing in global supply chains. To gain an edge over international competitors in these sectors, Australia must increase the productivity of its workforce and tie education and training more closely with the skills required for the future. Simple stuff really.

Conclusion

• Australia has been riding on the back of good fortune for the last two decades. Not only has the tide turned in the other direction, we are unsure of exactly how to get out of the swell. To maintain the high living standards that most Australian’s enjoy, it must engage in the global market place for the provision of high quality goods and services. This requires a rethink on our reliance on mining and investment in the markets of the future with a productive and educated workforce.

This update does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.