NSW has slid into recession and is a disaster zone
IT'S official. New South Wales, the biggest and still the most important state in the
national economy, has slid into recession.
So does that prove the Reserve Bank went too far with interest rates? No. Because the rest of
Australia - ALL the rest of Australia - is NOT in recession.
High interest rates obviously didn't help. But the blame for NSW's uniquely parlous economic
condition can be laid at the feet of the politicians in Macquarie Street not the bankers - central
and commercial - in Martin Place.
And while it's not the fault of RBA governor Glenn Stevens, it sure as hell complicates his job.
It's tough enough that he has to try to balance the flow-on from our booming commodity
prices with the negative impact of the global financial meltdown.
So that he - and we - have this uniquely bifurcated economy. The booming resource states,
especially Western Australia, and the rest.
Which incidentally just goes to show that NSW's woes are home grown. The other non-
resource states - Victoria, South Australia, even Tasmania - are doing (relatively) quite nicely,
That word 'relatively' is important. Retail spending remains subdued - as best we can tell
Both the number of homes financed and the amount lent to buy them are well down on 2007.
All good, going right according to plan.
That's, Stevens's plan. And that's if we focus at the NATIONAL level, Australia overall.
It becomes a very different matter if we zero in on individual states. Mostly, there isn't that
much difference. With that one huge and very significant exception. NSW is a disaster zone.
It would appear that you can take the economy out of the premier state; as the state
government has done very successfully. Or perhaps more accurately, unsuccessfully.
The big question is whether you can take the state out of the national economy. Please.
NSW is one-third of Australia. Is it going to drag the whole nation down; will it derail the
delicate balancing act Stevens and the RBA are embarked on with interest rates?
First those national figures. There's a key additional point to be made, critical to my
characterisation of the NATIONAL state of play.
That both retail and housing finance have fallen, but both now appear to be levelling out.
There is actually room for some growth uptick running down to Christmas and into 2009.
Importantly, not only would that NOT phase Stevens. But he and the RBA actually want it.
If retail sales and housing finance kept heading south, we'd be on the way to a full-blown
Yes, we would then get many interest rates cuts. But you would not sincerely want the
'package': lower rates and a recession.
Now, both retail sales and finance to buy new and used houses - the two areas that soak up
most of the family and individual budgets - are down on the latest numbers.
Retail sales were growing at around 0.7 per cent or so each month last year. That might not
sound like much, but that adds to something like a rate of 8-9 per cent a year.
Take off inflation, which in retail was probably running around 3-4 per cent, and you were left
with something like 5 per cent REAL sales growth.
That's great for retailers, and indeed consumers. And in our 'yesterday' - 20th century -
economy, it was indeed fine. When we needed the demand to create jobs.
Stevens set out quite deliberately to force consumers to pull back on their spending. The
evidence is prettty clear that he succeeded.
Growth in consumer spending has been hauled right back to barely positive month-to-month.
On the figures just 0.1 per cent a month - a rate of barely 1 to 1.5 per cent a year.
Take off inflation, now probably running higher at perhaps 5-6 per cent a year; and it's an
understatement to say the REAL growth in consumer spending has gone negative.
It's a similar story with housing finance. Both in housing numbers and finance dollars. In the
back-end of 2007 financial institutions - mostly but not exclusively banks - were lending a
mammoth $65 billion or so each month to finance the purchase of 23,000 or so homes.
Now monthly finance is down around $50 billion, and the number of homes around 18,000.
Again, to stress, these numbers are national, across Australia.
The trigger for these changes is obviously those interest rate rises. Did the RBA go too far -
especially with the last two rises in February-March?
The answer is an emphatic no. But it requires an understanding that this is more or less
precisely what the RBA sought to achieve; HAD to achieve.
NSW though makes things hugely complicated. Because clearly things have gone 'too far' in
that state. Its retail sales have actually been FALLING every month this year.
Certainly only falling marginally. But that's in nominal dollars. Take out inflation and they have
been seriously negative.
On my rough calculation they are running 5-6 per cent LOWER than a year ago. That IS
Same story with housing. If you adjust the numbers for population, NSW housing - both the
dollars lent and the number of houses financed - are fifth in a field of six states. NSW only
beats Tasmania, and only just.
So not only is NSW much worse than the other states in both retail spending and housing, it
drags those national numbers down. You wouldn't care - statistically - if it were Tasmania.
So if you take NSW out of the national numbers, the NATIONAL numbers are precisely where
Stevens would want them to be. Subdued but not in or even heading towards recession.
Put NSW in and you'd want to see them - you'd be happy to allow them - to pick up a bit. The
housing ones do seem to be doing that.
This is a dammed difficult situation. Both trying to assess the mix and the national picture
when one-third of the national economy IS in recession. And even more to apply the
A further problem with the retail numbers is that we just don't REALLY know. Wayne Swan
and Lindsay Tanner in their wisdom stripped the Australian Bureau of Statistics of money.
Now it only gives us 'trend' figures on retail sales. They're great for telling us where we have
been. But completely unable to pick turning points on a timely basis.
Talking about saving a penny and losing a pound. The Rudd Government has saved $20
million on ABS funding, and could potentially cost us billions.
Fortunately the RBA will make its own independent assessment. The problem is not so much
trying to assess what's happening, but how to balance NSW against the rest of Australia.
Freddie and Fannie justify confidence in our banks
Our banks came out swinging yesterday and they had a very real and justified point.
Two points actually. That a sound banking system in which ordinary savers can have
confidence is hugely beneficial. It will also save the taxpayer real dollars.
The trigger for the statement from David Bell, the CEO of the banking umbrella body the
Australian Bankers Association, was the US bailout of 'Freddie' and 'Fannie'.
Bell said the bailout was estimated to cost US taxpayers up to US$123 billion. The equivalent
figure in Australia, by the way, would be around $15 billion - about two years of the last
Costello-Swan tax cuts.
Bell added that this was the second major US taxpayer bailout in just 20 years. The other was
the S&L (savings and loan) crisis in the 1980s.
"In contrast to the US, except for failed government-owned banks, no Australian taxpayer
dollar has supported a private bank since the 1890s," Bell claimed.
Just to make sure that date is clear. That's the 1890s - over 110 years ago. Not the last
decade of the most recent 20th century.
Including that Sarah Pallin-like less-than-subtle dig at the state bank disasters at the end of
the 1980s - that WAS in the recent past - Bell's double point is well made.
Both in the broad historic sweep and the recent past. Despite all those recent negative, dare I
say it, overblown headlines. And utterly irrational exaggerated movements in bank share
ALL four big banks retain their double-A credit rating. Among not much more than a dozen or
so banks in the ENTIRE developed world.
So the confidence factor is absolutely crucial. It's the most basic arithmetic reality in finance.
Unless people are prepared to put their money IN a bank, the bank won't have money to lend.
To build or buy houses. To make the investments which build jobs and production.
The second issue is government bailouts. Not only is it hugely destructive of confidence - and
not just in the financial system but the basic economy. But it COSTS TAXPAYERS!
Now what the US government has done to bail out Freddie Mac and Fannie Mae was
certainly necessary - unavoidable might be a better word - and so arguably even appropriate.
They own or have insured about half of all the home mortgages in the US, adding to
something like $US5 trillion of value. That's about six times the value of all the home loans in
To contemplate either or both institution going into some form of receivership, far less a real
collapse, would have sparked unimaginable financial and economic chaos.
And not just in the US. Because the money that FINANCES that $US5 trillion comes from
around the entire world.
You call what we have seen in the past year a financial meltdown? THAT would be a
meltdown - sending us right back to a 1933 future.
So yes it had do be done, and the way it has been done is clearly the best.
It imposes real even total pain on the shareholders in the two, while achieving real stability
and minimising the taxpayer exposure.
But it remains just awful. 'Moral hazard' doesn't even begin to describe it. The taxpayer is
bailing out investors.
What is worse, is that the system and major individuals aren't held accountable.
A real part of the problem is those cuddly nick-names.
It makes them sound neighbourly and solid. When they were intrinsically misconceived in
their original goverment ownership - which gives indirect bite to Bell's throw-away reference to
our state bank losses.
And still misconceived but turned into a massive financial disaster waiting to happen, when
they were sold supposedly into privatre ownership a few years back.
They capture everything that is wrong with the US financial system. Their absence from
Australia captures everything that is right with ours.