Wednesday, February 22, 2012
It's a bit worrying when any economist takes that approach in the real world. It's seriously worrying when the economist is someone as bright and as influential as Treasury secretary Martin Parkinson, for whom I have a very high regard.
It makes you worry that, after their growth forecasts have repeatedly overshot the mark, Treasury and the Reserve Bank still do not understand the strength of the headwinds the economy faces from the combination of high debt, high interest rates, and a dollar at record highs.
I hope they're right. But in three of the past four years they've been proved way too optimistic. If they've got it wrong again, then it's game over for Labor, whoever leads it.
Last Friday, Parkinson told the Senate economics committee the economy was growing at about trend pace and underlying inflation was in the middle of the Reserve's target zone.
''If you look at those two macro aggregates, you would think things are tracking along in a fairly sweet spot,'' he said.
''[Yet] there is an overwhelming negative sense about much of the national discussion and debate. I do think the whole mindset is a bit overdone … [we are] in the grip of unjustified economic gloom. Yes, there are challenges but the opportunities ahead of us are the sort we've never seen before.
''It's almost as if most Australians tend to think we live in Greece. We don't. We actually have an incredibly bright future in front of us.''
Hold on: let's test that against reality. Two days earlier, the Westpac-Melbourne Institute index of consumer sentiment, on which 100 means optimists and pessimists are evenly balanced, came in at 101.1.
I suspect that is far, far higher than it is in Greece.
A day earlier, the National Australia Bank's business survey reported a similar finding.
Business confidence and actual business conditions were both in positive territory in January, if only marginally.
Small business is pessimistic. The Australian Chamber of Commerce and Industry reports its confidence is now at the lowest point since March 2009.
But then so are its business conditions and, more or less, its profitability. Debt tracker Dun & Bradstreet reports small business failures in the December quarter jumped 48 per cent year on year and 128,000 firms are likely to experience ''financial distress'' in 2012. Does small business know something Treasury doesn't?
Australians don't think we live in Greece. But nor do we think we live in a ''sweet spot'' where all the economic fundamentals are going well.
And when Treasurer Wayne Swan, the Treasury and the Reserve Bank try to tell us how good things are, we sense that their whole mindset is, indeed, a bit overdone.
And since they make the big policy decisions, that is cause for concern - except for the Liberal Party, which has reaped the benefit of past policy errors.
First, let's check those fundamentals. In the year to September, seasonally adjusted GDP grew by 2.5 per cent, or roughly 1 per cent per head; that's a bit below trend. Job growth, which was fundamental when I was a kid, has slumped from 344,000 a year ago to just 22,000. Unemployment is still just 5.1 per cent because, for reasons that are unclear, people without jobs have left the workforce rather than look for work.
None of those figures are world-beaters. Of the 34 advanced economies, Australia ranks just 14th on growth in GDP. It is in the bottom half on growth in GDP per head. It has only the equal 10th-lowest unemployment rate.
But there is a more serious problem, which Parkinson freely concedes. If GDP growth is close to trend, it is because one part of the economy is really hot - mining investment - while the rest is becoming colder.
The geographical divide is stunning. In the year to September, domestic demand (that is, spending) grew by 4.2 per cent, much faster than GDP, because so much of the new spending was on imports. But that was an average of two very hot states and four cold ones.
The trend measure shows demand grew by 13 per cent in Western Australia and 8.2 per cent in Queensland. But in all other states, it grew by between 0.1 and 1.7 per cent. Outside the mining states, spending per head was virtually flat.
The bottom line is that 77 per cent of the trend growth in spending over the year was in WA and Queensland, which have 30 per cent of the population. Only 23 per cent was in the rest of Australia, which has 70 per cent of the population.
Since the start of the GFC, Australia has added 92,000 jobs in mining and 62,500 in construction. But by November it had lost 127,000 jobs in manufacturing, almost as many as in the entire 1990-91 recession.
On current trends, there will be a lot more jobs lost in the cities where Australians live, where their partners work, their kids go to school, where they have their homes, their families and friends.
As Liberal senator Arthur Sinodinos and Labor's Doug Cameron emphasised to Parkinson, the ''structural adjustment'' that costs them their jobs has to generate new jobs where they live, not on the other side of the continent.
I think that's why most Australians are wary of Treasury's optimism.
They live in the real Australia, not in a statistical average.