Consumer confidence has crashed in Australia – just one week since the release of the Federal Budget.
According to the ANZ-Roy Morgan survey out today, consumer confidence plunged 3.2 per cent last week pulling down the monthly index by 14 per cent, as word started leaking onto the street of the fiscal policies due to feature in Hockey’s first horror budget. It is now the steepest decline in Australian consumer confidence since October 2008, the month after the collapse of Lehman Brothers.
It would be nice to think confidence is falling due to genuine awareness of the deterioration of our economy and knowledge of the factors driving it (China/mining, Dutch disease/high Aussie, high labour costs, household debt etc), but from the rhetoric reported in the main stream media over the past week, this is clearly not the case.
After years of being told Australia is a miracle economy – the envy of the world (‘Ten reasons Australia is the envy of the world – News Limited’), Australian constituents still expect unsustainable spending and big promises at a time when Commonwealth income is under a little bit of pressure. 22 years of continued economic expansion creates some heavy complacency. The weekend was meet with austerity style street protests as the axe fell on health and education spending.
It was clear Australians were starting to exhibit the effects of cognitive dissonance in the lead up to the election. Anxiety of significant budget cuts were cast aside by fierce debate on Australian government debt levels ranking some of the lowest in the world and why any cuts to spending were actually required. Few understood the connection between deficit and debt, and why you would need to balance the budget when you can spend yourself to prosperity.
The rhetoric drowned out warnings from the International Monetary Fund (IMF) a month out from the budget that, of the world’s 29 most advanced economies the IMF monitors, Australia’s budget position had deteriorated the most over the preceding 6 months. Also absence from the main stream media until this week was the fall in iron ore prices – Australia’s largest export – down approximately 21 per cent in the four leading weeks to the budget.
When colleagues asked my thoughts on the budget Thursday last week, (Wednesday they were still in despair) I started talking about the recent fall in the iron ore price. Just as I started to question what iron ore price the budget was modelled on and if our position had already deteriorated further, I was interrupted with the statement, “but I want to know how the budget will effect me?”
So it was an immense relief to find my sanity today when News Limited’s Terry McCrann wrote under the headlines, “Worry about the iron ore price, not the Budget”.
Terry McCrann writes:
JOE Hockey’s Budget has unleashed an unprecedented wave of fear and loathing.
But if you really want something to worry about, worry about the iron ore price.
Surely, you might respond, that’s Gina and Twiggy’s problem in particular, or the big end of town more generally. If they lose a billion or two, your attitude might lie somewhere between “what’s it to me, anyway?” and “they’ve got it coming to them”.
If so, think again. In the most direct way, Gina and Twiggy’s — billionaires Gina Rinehart and Andrew “Twiggy” Forrest’s — losses would very much also be your losses.
More specifically, what’s happening to the iron ore price could rip a huge hole in Hockey’s Budget, potentially far bigger and more immediately than the Senate and Opposition Leader Bill Shorten could do. But also, last into the so-called “out years”.
He even mentions our housing bubble:
More broadly, both the Budget and the economy are built entirely on the twin pillars of super iron ore profits and super bank profits, with the latter built almost entirely on the reborn strength in the property market.
A slump in iron ore profits would be bad enough — for the Budget and the economy; it really does not bear thinking about if property were also to hit the wall and bank profitability went into reverse.
So what is driving our reversal in iron ore fortunes? Frequent readers here will know it’s cracks in China’s stressed housing bubble.
China’s residential property sector absorbs 24 per cent of worldwide steel consumption. China’s National Bureau of Statistics reports new property construction has fallen 25.2 per cent in the first quarter this year.
But it is not the first time we have been witness to this. Overnight the Iron Ore price fell 2.2 per cent through the psychological $100 USD tonne to end up at $98.50. The last time this happened, on the 24th August 2012, I posted that day, (‘Has the mining investment boom come to an end?‘) reporting on the decision by BHP to delay the Olympic Dam expansion and China’s Fixed Asset Investment Binge. At the time, China’s housing bubble tried to burst sending Iron Ore prices plunging to sub $90 USD tonne in the weeks later before the Chinese government was forced to provide stimulus and prop the bubble back up.
Perhaps this is the reason few has been interested in the Iron Ore fall this time. Endless bailouts has built a thick layer of complacency.
But what happens if it is different this time?
China is now under the new leadership of Premier Li Keqiang, after assuming office on the 15th March 2013. While he served as first Vice-Premier under then Premier Wen Jiabao from 2008 to 2013, he brings refreshing views on economic sustainability and regularly voices objection to using short-term stimulus policies to boost economic growth.
Earlier this year we witnessed the first onshore bond defaults under new Chinese leadership (‘China: Did the first Domino just fall in GFC2?’). The expectation was for a bailout, but to everyone’s surprise no one stepped up to the plate. Many described the collapse of Shanghai Chaori Solar Energy Science and Technology Co. as a “Watershed” or “Bear Stearns” moment.
Not long after Premier Li Keqiang warned “We (china) are going to confront serious challenges this year and some challenges may be even more complex.” (‘Premier Li Keqiang: China to confront serious challenges this year’) Li said China must prepare for a wave of bankruptcies, which at the time many interpreted it to signal the end of an era when the People’s Bank of China was only a stone throw away and ready with a bailout.
In an article published in Qiushi magazine, Premier Li remarked, “Last year we avoided an economic hard landing and maintained stable economic growth. This achievement was largely because of reforms…If we had used short-term stimulus measures last year, they would have brought future pain.” In a speech in April, Li said “We will not use short-term strong stimulus policies because of temporary economic growth volatility.”
Time will tell if or at what point China will step in to soften the blow of one of the world’s great property bubbles.
And speaking of ours – the 2nd pillar of the Australian economy according to Terry McCrann – we all know it runs solely on consumer confidence as any real fundamentals left the market over a decade ago…
» ANZ-Roy Morgan Consumer Confidence: The Budget Blues – Confidence Weakens Further – Roy Morgan Research, 20th May 2014.
» China property slowdown to hurt Australia – The Sydney Morning Herald, 14th May 2014.
» Government won’t resort to short-term stimulus, Li says – The China Daily, 11th April 2014.
» China’s Property Bubble Has Already Popped, Report Says – The Wall Street Journal, 5th May 2014.
» China Housing Market Bubble Start to Pop as Economy Faces Hard-Landing – International Business Times, 14th April 2014.
» Chinese developers bring in security as buyers experience negative equity – Who Crashed the Economy, 5th April 2014.
» How China Fooled the World – Airing in Australia on the ABC – Who Crashed the Economy, 31st March 2014.
» Premier Li Keqiang: China to confront serious challenges this year – Who Crashed the Economy, 16th March 2014.
» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.