G20 HUBRIS

For my readers in other countries, you probably were bemused by the lecture recently given to the statesmen and women at the G20 by the Australian Prime Minister. For many of us here, it made us cringe. This woman is an old style British socialist from the valleys of South Wales (UK). She will only ever be a footnote to history as the first female PM in Australia, for destroying her very reputable predecessor (Kevin Rudd), and lying to the electorate.

What her admonishments at the G20 omitted was the chaos in Australian economic policy. This chaos is being masked by the booming resources sector, without which Australia would be headed down the European road right now. So called climate change policy is destroying large swathes of manufacturing with massive job losses. Banks will not finance electricity generators. What does she do? She gives large amounts of taxpayers money to companies which otherwise would have to sack their workforces so that they can pay her carbon tax she said she would not introduce. Similarly, a return to industrial relations policies which belong to another age where “workers” doffed their caps to “bosses” is scything through the SME sector.

Australia today, readers, is like an obese person who does not want to get on the scales to see how heavy they are. There is a heap of bad news out there, masked only by iron ore, coal and LNG exports to China and India. If that slows, there will be no option but to get on the scales and take the medicine.

There have been recent Australian statesmen who should proudly and properly address the G20, from both sides of politics. She isn’t one of them. Sorry.

IS THIS AUSTRALIA'S INDIAN (CHINESE) SUMMER?

One of the more sober assessments of the European situation came this week from the New Zealand Prime Minister, John Key, speaking from Berlin. Key is a smart and very experienced operator and worth listening to. He commented that Greece is such a small economy that is it not likely to cause the collapse of the euro. Nor is it likely that Greeks will vote to leave the Eurozone. This contrasts with much of the hype in the Australian media.

That hype went into overdrive this week on the release of the Australian economic data. What it misses, but has been picked up a little by Alan Kohler, also an experienced operator, is that you must look behind the aggregate GDP data. If you do, you see a much different picture. As Peter Switzer commented in the Weekend Australian, if the economy is so good, why don’t we have inflation?

By far the bulk of the reported GDP gains were in resources extraction and from a relatively small group of people. Hence the per capita productivity data reported this week. Take out resources (and i suspect some of the GDP growth should be reported as GSP growth since whilst it may be Australian companies that are reporting, there is a huge amount of imported capital equipment which you can see affecting the current account data), and you see a very different economy.

Is this Australia’s Indian Summer?

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THE VALUE OF LOW SOVEREIGN RISK

Last week, the German government was able to issue bonds (“Bunds”) with a yield of 0.07%. That is a negative real interest rate. Few countries can do this: the United States can when it issues Treasuries. What does this mean for business capital costs. Typically the cost of raising capital for companies is a function of the so-called risk free rate (government bond rate). If you an Australian business you therefore pay substantially higher debt cost than a German or United States business since Australian Commonwealth bonds are considerably higher yielding. That means there are fewer Australian businesses that can attract capital since resulting hurdle rates are higher in Australia than those other two countries.

What we now see is business credit constrained by the adoption of Basel 3 rules etc. because of that tighter prudential regulation and more costly because of higher Australian sovereign risk.

WITHER CHINA?

What I did not comment on yesterday was WHY some manufacturing is moving to Europe from China. Dr Clint Laurent from Global Demographics reports that “Asia is turning into a content of empty nesters” and that “the Chinese labour” market peaked in 2010”. In the coming 10 years he says, “ the workforce will shrink by 40 million”. China “has no spare capacity in terms of labour.  Everyone  who can work is working”. “Its industrial boom had been helped in part by an influx of people from rural areas…and that resource too had all but run out with most young people having already migrated” to the cities”.

The “current steep rises in labour costs in China are due to the ageing of the population” and are “set to rise as much as 14% p.a.” “Chinese demographic shift is real and is happening now” he says.

“He also says that “the youngest age brackets in India are no longer growing”.

This is one of the reasons that some manufacturing is moving to Europe – ageing of the population and the exhaustion of hitherto cheap labour pools is starving the Chinese economy of lower cost workers.  (www.theaustralian.com.au/

business/paulgarvey)

I have long known that the real cost of a skilled IT or science based worker is cheaper in some European countries than it is in China or India. Now that paradigm is being extended to lesser skilled workers. Hence my long standing focus on Berlin as it regains its economic hinterland.

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Yesterday, I commented on the evolving and essential role of Germany in the world economy and the move of some manufacturing TO Europe. And how present events suit  long term German political economy. Reported this week is that the German trade surplus is around USD 200 billion. For Australian readers, this is around 60% of the present Federal Governments annual budget and around 15% of Australian GDP.

THE INCREASING IMPORTANCE OF GERMANY

I opened an office in Berlin in 2000 and have conducted business in that city since 1986. Times were very different then. Some of my colleagues took a lot of convincing that we should have an office there. We did so for a number of reasons. One of them is that Germany has approximately half of the worlds’ post-doctoral talent in the hard sciences. This generates investment opportunity. I also took a long term view that Germany would regain its prewar(s) status as an economic and political powerhouse and so it has proved to be. Interesting to note that the new French President flew to Berlin within a week of taking office.

There is a report from Dr Clint Laurent of Global Demographics noting that some manufacturing production is moving from China to Eastern Europe. “There is a large underused workforce…..eastern Europe’s GDP will grow very rapidly as a result of the change in the size of the labour force of the Chinese economy”.

My long term analysis was based on the fact that East European countries are like the Mexico of Europe: cheap skilled labour, proximity to markets, the Euro (much maligned at present), great transport infrastructure, and huge manufacturing infrastructure in Germany which leads the world. Some of this is happening in former German lands: all of it is happening in Berlin’s former economic hinterland.

Add German manufacturing competence and product innovation to low cost labour: that will produce a world powerhouse of the future provided the Euro does not appreciate in value too much. Keeping some countries on life support might be a small price to pay for such a prize.

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