THE AUSTRALIAN ECONOMY AND BUDGET 2021

Robert Gottliebsen has been writing and commentating on the Australian economy for more than half a century. These days, he is a regular columnist for The Australian. As Australia emerged from its 2020 pandemic lockdowns and social distancing, discussion of just how the 2021 Budget would handle the recovery began. In a comprehensive discussion via Zoom for The Sydney Institute on Wednesday 15 March 2021, Robert Gottliebsen gave his views on what to expect.

THE AUSTRALIAN ECONOMY AND BUDGET 2021

ROBERT GOTTLIEBSEN

The most important thing to understand about the Australian economy is just how strong it is. There are parts such as aviation and parts linked to the overseas student/tourist movement that are depressed of course, but the overall strength of Australia is just unbelievable.

Let’s start with the property market. In most areas of Australia, dwellings are rising in price, and in some areas, the rise is spectacular. I have been living at the surf coast for most of the pandemic. A house that wasn’t selling at $1.6 million for months was recently sold in seven days at $2.7 million. That’s an amazing rise in six months. The jump in house prices and rates of sale are taking place all over the south and north coast in NSW, plus Queensland.

Buyers of these properties are either existing people who are upgrading, or they are new buyers such as first home buyers. We are going to see a big rise in homeownership in the next 2-3 years. And what is so interesting, is that a lot of the houses that are being purchased by people moving out of Sydney or Melbourne.

Toowoomba in Queensland is booming, Ballarat in Victoria is booming as are the South Coast and North Coast of NSW. We tend to say that these buyers are going to commute to the city, or they’re going to use Zoom for work. But, a great many of them have decided they are going to live in these regional areas. It’s the first time in our history that we’ve seen a real move away from the two capital cities.

That doesn’t mean the cities are dying. But there’s a change in the population mix.

Meanwhile the greatest problem in anything to do with building, is a shortage of skills, and that shortage of skills also extends into cafes and all sorts of areas. You talk to these businesses and their greatest enemy and their greatest rival for labour, is JobSeeker. It is taking away lesser skilled people from the workforce. As for actual skilled labour, that’s also incredibly short. Reading the newspapers, you often get quite a different view.

This boom actually started right in the middle of the pandemic, when Australians began buying goods from Bunnings and homeware groups – furniture and all that sort of thing. And it has kept going, getting faster and stronger. Whenever you have a homebuilding boom combined with an existing home buying boom it has massive impact.

Now, why did it happen? There are lots of reasons, the biggest of all is the fact that we put interest rates down to token levels and eased bank credit. We also gave all sorts of incentives for people to buy houses. It’s not the investor that’s come in — the investor is not really there. It’s people buying houses to live in them. Moreover, most of the lending restrictions put in after the Royal Commission have disappeared. They may come back, but at the moment it’s pretty easy to get money.

Now, this boom will need to be managed. The great risk we face is that we won’t manage it and inflation will break out leading to higher interest rates. However, the US is where you see the inflationary risk at a much greater level.

There are other developments taking place that are equally important. First is JobKeeper. It was executed well despite the things that go wrong when you do something fast. Overall, it was done skillfully.

What was really interesting, was that sole traders, independent contractors and small enterprises all got included. They wouldn’t have been included had JobKeeper been up and running 3 or 4 years ago, but Josh Frydenberg was very careful to do that. That leads us to the next step in this revolution that we are watching taking place.

We are going to accelerate the payment of money from large enterprises to small enterprises. That will start this year. A register is being set up of large enterprises and they’re required to say how quickly they pay small enterprises. It’s the first time we will be able to see delinquent directors who are not paying their enterprise bills correctly. In 20 days, they have got pay. This year will be mostly identifying bad directors who are not paying their bills properly. Next year, the government will crack right down, and enterprises will lose their government contracts.

Accordingly, we are going to see an acceleration of payments from large corporations and large enterprises to smaller ones. That’s a very big change, particularly when it’s associated with the second of these changes—unfair contracts. Contracts where large enterprises have all the rights and the small enterprise doesn’t, are now illegal. A business in this arrangement will be fined. We don’t know how many million of such contracts there are in the community, one estimate was 8 million, my guess is about 3 or 4 million..

The combination of these changes is going to impact business relationships and the way companies do business; it will certainly accelerate the flow of money in the community. Already, the banks are saying they will be able to lend on cash flow because they know it’s coming. In that background, what can go wrong? The most obvious is inflation and the US is the weakest link in this chain.

I haven’t mentioned the China situation. Here there is no easy answer. When you talk to the people in Canberra, they are not in the mood to change their line and they see China in quite a hostile way. Businesses making representations to people in Canberra don’t get anywhere. China is a huge trading partner. Canberra doesn’t understand its importance  and that could turn quite nasty.

What makes us vulnerable is that we are completely stuffing up our defence. I don’t think there’s a country in the world that has ever done anything like we’ve done in recent times. We’ve committed something like $300 billion – a lot more than JobKeeper – to three very, very high-risk exercises. The first is the joint strike fighter, or the F35. If that’s a failure, we will not have a proper air defence. The second one is, of course, the submarines and the third are the frigates.

We desperately need a Defence Minister whose job it is not to conceal the mistakes from the Defence Department, but to tell the truth. We haven’t had one of those for a long time. This is not an attack on the present Defence Minister. I know she’s had other problems, but she was handed a “hospital pass”, to use a rugby term analysis. It was a very bad “hospital pass”. She just kept saying everything was okay. The Defence Minister announced that the joint strike fighter, or the F35, was on budget and on time. In fact, it’s about 10-15 years late and it’s about four or five times over budget.

I want now to go to the US. What’s happening in the US is terribly important. The money supply in the US has been rising roughly about 20 per cent a year. That has not caused rampant inflation for a number of reasons.

Firstly, the velocity of money has been quite slow because of the pandemic. The nearest equivalent people say they have seen was with the First World War, where similar supply increases didn’t cause inflation, until the war ended. In the US, the new President is very different from any president that has been elected for a long time. Biden did a deal with various people to get that nomination, and we are now starting to see what that deal was.

Biden is going to spend $1.9 trillion. As the vaccine comes through, the velocity of money in the US is going to accelerate dramatically. Skills that are already short are going to get much, much shorter. We have seen the bond market start to get twitchy about this. It could get a lot more twitchy. Then there’s a second change in the US which in many ways will be even bigger.

They have what’s called PRO Act Legislation. The PRO Act Legislation is being pushed through the Congress. This not only stops independent contracting, but it’s very favourable to the unions. So, we are going to have, in the US, a unionised society combined with huge amounts of money coming into the economy. The velocity of that money will rise sharply while the independent contracting system which is a base of the US  capital system is on the way out.

This is quite dangerous. You could easily see the 10-year bond rate go to 3-4 per cent – a significant percentage increase. That will test the US market and the value of assets. On the one hand you have the boom, but the other hand you’ll have higher interest rates.

Our banks are well aware they have to borrow on that US market. When they borrow long term, they do it on an average basis – so, a little bit this year and a little bit next year, over rates are impacted over many years. It will take a while to affect us, but it will affect us.

The first thing I do every morning, is look at the US 10-year bond rate. That’s the key rate. It’s stabilising now at about 1.5-1.6 per cent and it might stay there for quite a while. But that’s the danger area in my view. And then, the whole China situation affects Australia and the rest of the world.