Apart from that, recession seems to be on the cards. Last week China lowered its growth target for 2015 from 7.5 per cent to 7 per cent.
The RBA index of commodity prices has already fallen more than 40 per cent and the terms of trade have fallen by 25 per cent. As a result, nominal GDP growth is running at a six-year low of 1.7 per cent and looking weak.
Consumer spending is reasonably strong, but fragile. The only industry showing enough resilience to offset the massive decline in the resources sector is housing.
Dwelling approvals surged to a record high of 197,000 in 2014 and accelerated in January, with high-density multi-dwelling approvals jumping 20 per cent in one month.
The number of building approvals is now running at an all-time high, and since history shows that about 97 per cent of approvals turn into starts, there is a big pipeline of construction work.
This chart from UBS economist Scott Haslem shows why:
It’s all about population growth. On a per capita basis, Australia’s housing starts have been in trend decline for 40 years and the number is now roughly half what it is was 1973.
It means that the most important part of last week’s fourth Intergenerational Report was its population growth forecast: 1.6 per cent per annum for the next decade. This compares with the forecast of 0.8 per cent per annum population growth in the first IGR in 2002.
The new forecast equates to about 400,000 people a year, of which 215,000 will have to be migrants.
That means about 200,000 houses and flats will have to be built each year for the foreseeable future.
In other words the key lever of economic policy for Australia nowadays is not monetary policy, or fiscal policy – it’s immigration policy, and fertility.
Monetary policy, in fact, is almost lifeless, even though the RBA is prodding the corpse. The problem is that it requires people to borrow money, or not save as much. If they don’t want to do that because they already have too much debt, then monetary policy doesn’t work.
That’s more or less what Reserve Bank deputy governor Philip Lowe explained in a speech last week:
“Economic activity does not appear to have responded to the stimulatory monetary conditions in the way that occurred in the past … Perhaps the single most important factor explaining this is the very high levels of debt that exist in many advanced economies.”
Fiscal policy is also a dead duck. As Treasurer Joe Hockey explained in a very revealing interview with The Australian’s Paul Kelly and Peter Van Onselen on Sky TV yesterday, taxes can’t be increased, either philosophically or practically, and spending can’t be cut.
He said: “We are not sacrificing savings, but we can only get through the Senate what we can negotiate … we have laid down a plan, we are not going to retreat on the plan and offer another plan that is just rejected by the Senate. All that does is create enormous uncertainty and instability and also at the same time it just allows our political opponents a get out of jail free card.”
This morning global hedge fund manager Crispin Odey told the Australian Financial Review that economies dependent on China, including Australia, are headed for recession. Needless to say, he has gone short Australia.
The only reason he will be wrong, and will lose his shirt on this bet, is the houses that have to be built for the 400,000 new Australians per year.