Why Aussie economic growth is set to slow sharply

Thursday, 2 September 2021 — Albert Park

[7 min read]

Economic growth data is so old by the time it hits the headlines, the market usually yawns.

So was the case yesterday.

In the three months to 30 June, the economy expanded 0.7% in seasonally adjusted terms. This was ‘better than expected’, but the market has already priced it in…months ago.

Predictably, business commentators rejoiced because it means we’ll probably avoid a ‘technical recession’, which is two quarters of economic contraction.

With most state premiers locking us down, the current September quarter will show the national economy going backwards. If we’re lucky, things should improve in the December quarter. Hence, no recession.

With the world slowly (maybe) returning to normal, does that mean we’re in the clear? Don’t bet on it…

As far as the stock market goes, it’s more concerned about nominal GDP growth, rather than the headline figure you see widely quoted.

Nominal GDP better reflects the amount of dollars flowing around the economy, which companies claim as revenue and profits.

As you can see below, following the sharp contraction in growth from the first lockdowns, nominal GDP bounced back strongly. Loose fiscal and monetary policy helped domestically. And China helped immensely by boosting our ‘terms of trade’ via record high iron ore prices.

All this contributed to annual nominal GDP growth of 15.5% in the year to 30 June.

Now, if we ignore the COVID impacted March and June quarters of 2020, what does more normal conditions look like?

In the year to 31 December 2019, nominal GDP expanded just 4.4%. That’s not a disaster by any stretch, but it’s substantially less than what we’ve experienced over the past 12 months.

Getting back to normal, for the stock market at least, might not be all that it’s cracked up to be.

And China might be leading the way. The South China Morning Post reports:

‘Temporary shocks caused by Delta variant outbreaks may have been to blame for depressing China’s economic sentiments in the past month, but economists warn that the latest falling purchasing managers’ indices signal further problems in the economy.

‘And they are calling for more loosening of liquidity and increased fiscal spending.

‘Meanwhile, there is an emerging consensus among analysts who believe that the peak of China’s post-coronavirus economic momentum is already behind it. Banks, too, appear to see the writing on the wall and have begun to slash their economic growth forecasts for China for the year, while Beijing is also taking steps that portend the headwinds facing the nation’s economy in the long run.

‘China’s official composite purchasing managers’ index (PMI), which gauges sentiment in both manufacturing and the services industry, dropped sharply to 48.9 in August from 52.4 in July, data from the National Bureau of Statistics (NBS) showed on Tuesday. A reading above 50 indicates growth in sector activity, while a reading below the watershed mark represents contraction. The lower the reading is below 50, the faster the pace of contraction.’

You’ll probably read excuses that this is mostly about increased restrictions to curb the ‘Delta strain’. Don’t believe it. As Jeff Snider points out in his blog, these economic activity readings are not slowing just because of China’s domestic situation.

The chart below shows both new orders and new export orders for China’s services sector plunging:

This next chart shows the same for the manufacturing sector. Again, new export orders are falling sharply:

What’s the message here?

China, AND the rest of the world are all slowing. That’s not particularly revealing news. The bond market has been telling you this for months. It’s only really the equity market that is ignoring it.

Oh, the iron ore price is telling you this too. While it’s still high by historical standards, the price has fallen 30% since mid-July. I would expect it to be lower still by the end of the year.

Given iron ore’s contribution to nominal GDP growth via the terms of trade boost, this is clearly going to take the heat out of Aussie nominal GDP this year.

The only question in my mind is how will the stock market take it?

Will it ‘look through’ and ‘shrug off’ the weakness, or will it decide to price in more risk via lower prices?

The benchmark index, the ASX 200, is thinking the former rather than the latter. As you can see in the chart below, it’s in a healthy upward trend:

In other words, you might need to see a bit more in the way of bad news to slow this market down. Just don’t be surprised when it does.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

‘Let’s drink to the hard-working people

‘Let’s drink to the lowly of birth

‘Raise your glass to the good and the evil

‘Let’s drink to the salt of the earth’

‘Salt of the Earth’, The Rolling Stones

Yes…we are hooting for the salt of the Earth. Saluting the faceless crowd, the lowly of birth…the masses…the hoi polloi…the proles.

In a few words: They are getting treated like Afghans.

Misled by the US empire, corrupted by its fake money, and then left behind as the elite slip away.

Cost of empire

Empires are always costly. And the costs are borne, mostly, by the working classes.

The Roman Republic was built by the blood and energy of its small farmers. Then, imperial conquests brought booty and slaves back to Rome. These were divvied up among the elite, who established large latifundia — farms run by slave labour.

The small farmers were driven out of business, forced to sell their farms to the big producers, and later, often forced to sell themselves and their children into slavery.

The US never figured out how to make its empire pay.

From the very beginning, it was its own ‘little guys’ who paid. They paid the taxes. They put on the uniforms. They may not have understood what ‘we’ were fighting for, but they were ready to follow the sound of the cannon from San Juan Hill to Mỹ Lai.

The Vietnam War was one of the US empire’s most spectacular fiascos. Your editor spent part of that war onboard a US Navy cruiser…comfortably off the coast of California or at our base in San Diego.

Offered the glory of commanding a river boat on the Mekong Delta, he demurred. Even then, it was clear that the war was an expensive and dangerous boondoggle.

Feds pull a fast one

So expensive was the war — and another contemporaneous boondoggle, the war on poverty — that the US couldn’t afford them both.

But rather than back up and admit its mistakes, the empire pulled a fast one; it began paying its debts in fake money, a new US dollar that it could reproduce at will.

With that move, in 1971, the working class was now in danger both at home and abroad, in uniform as well as in civvies. For now, US corporations could source their goods from low-cost providers overseas including some years later, Vietnam.

US manufacturing — the backbone of working-class wages — went into a slump. China entered global export competition in 1979, with labour costs less than one-tenth of those in the US.

American wages, in real terms, have been flat ever since. Measured properly, in terms of the time needed to buy food, transportation, and housing, the working stiff is much worse off than he was in the 1970s.

Costly wars

Then, the US government began using the fake money to make investments on his behalf.

The war on poverty, announced in 1964 as an ‘unconditional’ war…escalated. Total cost to date: US$25 trillion, est.

The war on drugs began in 1971…

The Gulf War — 1990…

The war on Afghanistan — 2001…

The war on Iraq — 2003…

The war on ‘terror’…

The bailout of Wall Street…

The war on COVID-19…

Stimulus to save the economy.

Altogether, these ‘investments,’ grosso modo, have added about US$27 trillion to the US national debt since 1980.

Bad investments

Had they been good investments, they wouldn’t have added to the nation’s debt; they would have paid dividends and added to its prosperity…

Less poverty would have meant more people paying taxes. Instead, fewer are paying taxes, with only 39% of eligible taxpayers paying any federal income tax in 2020.

A successful drug war, too, would have meant more people with good jobs, less crime, and less police enforcement. Instead, nearly half a million (mostly young…mostly men) are in prison.

Rather than helping support the nation with gainful employment, it costs $50,000 to $100,000 per year to keep them locked up…while drug use continues as before.

And where was the payoff from the US$7 trillion ‘war on terror’? There was none…

Wasted stimulus

And the stimulus? How much stimulating did it do? How much in extra tax receipts did the feds collect as a result?

Between March 2020 and August 2021, the Federal Reserve stimulated the economy with US$4 trillion in new money. It was the greatest ‘stimulus’ program of all time — by far.

What did it get for all that money? What was the return on investment?

GDP grew by US$1.2 trillion — not even a third of the money invested.

Tax receipts — the feds’ return on investment — went up, too…but only by an estimated US$150 billion.

In other words, the feds spent US$4 trillion to get back US$150 billion…a 96% loss.

None of these bumbling ‘investments’ paid off. They won no war. They bought no useful assets. They built no factories nor rent-paying infrastructure.

As far as we know, no investment was made in any productive industry or any fruitful enterprise.

It was all wasted.

Extravagant delusions

And there’s more…

As we saw yesterday, the feds are aiming for even bigger deficits…backed by even more extravagant delusions.

After earning so many gold medals in the Middle East, the warmongers are ‘pivoting’ to confront China.

And after so much success with Amtrak, there’s US$1.2 trillion of ‘infrastructure’ investment coming down the tracks, with a US$3.5 trillion ‘human infrastructure’ budget trailing behind it.

Also coming is global weather control…not to mention turning us all into better people, with better race relations and a more ‘equitable’ allocation of wealth!

But wait…how do the tillers of the soil, the factory girls, and the baristas pay for all this? What will these marvellous investments mean to the salt of the Earth?

Oh, dear reader…you already know, don’t you?

Stay tuned.

Regards,

Bill Bonner,
For The Rum Rebellion