Australia teeters on the brink of recession

 Or is already in it, and it's deepening.  

Just a few indicators.

1. Manufacturing only PMIs (the "recession line" is 50% -- below that, the economy is retreating.)

2. Whole economy PMI.   Still above the 50% "recession line", but sliding.

3.  Job ads are falling, both in absolute terms and year-on-year.  Note that job ads lag the cycle, as you'd expect.  My Oz coinciding index is a couple of months out of date.

4.  Overall GDP growth is still, barely, positive.  But GDP per capita has been falling for a while.

5. Real PCE (personal consumption expenditure).  Note the plunge in services consumption during lockdowns, as cafés, etc, were closed, and interstate travel was forbidden.  There were two major lockdowns, one in 2020, and another in 2021.  Note that this is not adjusted for population growth.

And yet, the RBA (Reserve Bank of Australia) is thinking of raising interest rates!   And the Labor government is deeply unwilling to initiate any fiscal stimulus -- afraid of being accused by the right-wing opposition of being cavalier with the exchequer.  Instead, their popularity declines steadily as ordinary people struggle.

Over the last 5 years, the RBA hasn't covered itself with glory.  Looks as if that's going to continue.

Australia's inflation continues to fall

In Australia, inflation continues to fall.  The RBA won't be raising rates again, even though inflation is still above its long-term target of 2-3%, because its trend is so clearly down.   Will they cut rates soon?  Prolly not.  Central Banks are by their nature conservative.  They'd like a few months' more data before they start easing.  It's clear enough that for Australia, the interest rate cycle has peaked.

Oz inflation rate continues to slide

 Despite rents and insurance, the overall trend in CPI inflation is clearly down.  There is no risk of inflation re-accelerating over the next couple of years.  Time, maybe, for a Labor government to give some welfare uplift, and tax cuts, to the worst off?  

Click on chart to see a clearer image (thank you Blogger!)

CBA's Oz PMI's rising

Commonwealth Bank's preliminary ("flash") composite PMI for Australia, fell a little in July, but the trend remains up.  We've had these little rebounds a couple of times over the last three years, though, so we'll see what happens.  House prices may have stopped declining (and the auction clearance rates for Melbourne and Sydney, which are very good indicator of house prices, are picking up), the iron ore price continues to rise, though coal seems equally determined to fall, and you could argue that there's been a marginal rise in the rate of wage increases.  It might be for real this time (I haven't yet resurrected my Australian leading index because I need to update my data files, so I can't be certain).

Record-busting heat in Oz

While the Arctic is much warmer than normal, it's still cold at the moment. Well, duh, it's winter in the northern hemisphere.  In the southern hemisphere it's summer, and here in Oz it's incredibly warm.  Australia always has hot summers.  But these are even hotter than normal.

(Source)

Meanwhile NOAA  has upped its sea level rise forecast to 2.5 metres by 2100.  And Greenland ice sheet is melting 600% faster than predicted.  But ask any denialist.  There's no global warming.

Read more here.

Nuclear power not a solution

Here are just a few of the reasons nuclear won't work in Australia:

Currently available nuclear power plants are between 1 and 1.3GW.
and they don't like being trimmed much below 60% of peak output
particularly in the second half of the refuelling cycle.

Minimum demand in SA [South Australia] is around 600 MW and in most cases there will be some wind
running or solar or gas so the plant will need to find export demand for around
500-600 MW and on a windy night again competing with wind and sometimes finding
that there is not enough demand from Victoria or capacity on the interconnect.

To solve that problem, Japan and France have built a lot of pumped hydro (almost
60% of peak nuclear capacity in Japan) or interconnects to other markets. That
capacity can also be used to backup the plant in case of an outage. However, if
you only have one nuclear plant you must have backup equal to the peak capacity
so a 1.1 GW nuclear plant (AP1000) needs 1.1GW of fast acting capacity. i.e a
combination of gas spinning reserves and pumped hydro. Now pumped hydro is great
for a 4-5 hour shutdown but refuelling takes 4-6 weeks every 3 years so that
means all of the nuclear capacity has to be replaced by gas for that time.

There is another little trick to nuclear power. If the reactor is disconnected
by a SA style event [the once in 50 years storm recently, which brought down 19 transmission pylons] for 2-3 hours there is a built up of Xenon 135 which "poisons" the neutron flux and stops the reactor working. The Xenon-135 can take 25-35 hours to die down before the reactor can start up again. Then it can take another 30 hours or so to reach full power. Imagine how much money the gas
generators are going to make during that time

Now to the cost. In SA a nuclear plant might manage 75% utilisation while on
line (same as France) and therefore 72% allowing for refuelling, generating
around 7 TWh per year.

Plant Vogtle in the US is currently less than half complete, 40 months late
already after 5 years of construction and currently estimated at US$21b
including finance costs for two units, if there are no further delays.
We [in Australia] have no experience in nuclear building and none of the skills and heavy
welding, lifting equipment so we learn by doing or import a lot of expensive
French or American labour and we are only building one unit. 

So less 15% for learning curve +20:30% for local costs +5% for seawater
cooling +10% for one unit not two so A$17.5b for one AP1000, plus storage + gas
backup and by the way it will take 10 years from permitting to full power. Then
add about $2-3b for the storage and $1.5-2.5b for a dual circuit interconnect to
the Sydney basin and using Pelican Point + Osbourne as the constantly running
"spinning reserve".

Permitting in the US and the UK where there are experienced regulators take 3-4
years. How are we going to do it quicker? So in total we can expect a 15 year
project from today.

Operating costs for nuclear are pretty cheap, probably around US$25-35 per
MW.hr. say A$40 but at a generous 8.5% weighted average cost of capital and 45
year life, the interest and depreciation works out at A$278 per MWhr + $40
operating costs. Be generous and say $310. Forward prices in SA now for 2020 are
$83/MWhr so the proposed nuclear plant plus infrastructure would increase the
already high SA cost almost 4 times

With falling wind prices, $17.5b over 15 years can build about 10 GW of wind. As
the capacity factor is increasing with every new generation of turbines, we can
expect about 45 GWh of annual generation. Now even if we added 25% of that
amount of wind to the existing fleet we would already be generating all the
power SA needed from wind so again we need gas and extra storage. The advantage
is that even though one or even three wind wind farms could be taken off line by
a storm there would still be plenty generating so with 1GW of storage there
would be plenty of time to power up gas turbines from cold. Thus although there
might be more gas generation over the year, there would be very few times where
the generators are running "just in case" so overall gas costs would be lower.

We have operating costs for wind turbines at about $15/MW.hr and capital and
depreciation over 25 years at the same 8.5% so we are adding about 2.5GW of
wind at a cost of $4.5b, Lets say a new interconnect but because we don't have
the Xenon problem it doesn't need to be large or ro bust and leave the storage the
same. So now we have a total system of $4.5b + $1-1.5 interconnector + $2-3b for
storage say $8b generating about 11 TWhr. or $123/MW.hr with no subsidies i.e.
less than 40% of the cost of nuclear even including the excessive storage.

[From comment from reneweconomy.com.au, via a comment in The Guardian--Hat tip to summerswood.  My minor edits in square brackets]

Oz gets hotter

Lifters and leaners

An excellent article on the latest Ozzie budget and the steep increase in inequality it will cause, from Melbourne's The Age.

During the First World War, Australian soldiers in London were abused by the officer class and the English as "verandah-post leaners". Cartoons suggest they were commonly found adopting that comfortable posture. Not only did the criticism from "above" fail to stop them leaning against convenient posts, they responded by leaning even more laconically. They weren’t leaning because they were lazy; they were leaning because, on leave from the Western Front, they had earned the right to lean. Leaning was a pointed demonstration to the English of colonial egalitarianism. As Australians, leaning was their right.

In his recent speech to the Sydney Institute, Treasurer Joe Hockey summarised the government’s philosophical position on equality as "for equality of opportunity rather than equality of outcome" (The Age June 13, 2014). He takes it as self-evident that it is "not the job of government to manufacture the outcome from public policy in such a way as to ensure that every person is an equal beneficiary ..." In saying this he is not only drawing on one of the most persistent criticisms of equality as a political ideal - that it is impossible to implement in practice - he is going much further: he is explicitly repudiating equality as a political ideal.

But, since it is not politically acceptable to repudiate the cherished and widely held belief that Australians are all equal, it is necessary to pay lip service to the idea, even while emptying it of content. "Equality of opportunity" is a well-tried cover. It is the version of equality you claim to believe in when you do not believe in equality at all. Indeed, some in the Liberal Party are now coming close to embracing the extreme neo-liberal position that it is actually inequalitythat is desirable, because it releases individual initiative and is economically more productive. That is a very difficult argument to sell in a country that boasts of its egalitarianism.

The big problem for Hockey and the Liberals is that the debate on equality has shifted dramatically. Since the Occupy movement popularised the divide between the 1 per cent and the 99 per cent, and the high-fliers shook off the GFC without penalty or shame, now followed by the extraordinary success of Thomas Piketty’s Capital in the 21^st Century, the discourse has moved onto different ground. The public issue is no longer the problematic ideal of equality but rather the relentless promotion of inequality.

Conservatives were much more comfortable with debating equality because of its historical associations with socialism, as even without recourse to philosophical argument, they could appeal to its seeming practical impossibility in real terms. But now people aren’t talking about equality, they are all talking about inequality. That is a debate in which the Right finds itself very exposed.

In Australia, where the meaning and extent of egalitarianism may be disputed, there is still a very strong attachment to the idea that we are, as a people, in some way equal. It is politically necessary for the neo-liberals to claim that, despite everything they say and do that might suggest otherwise, they really still do believe in equality. That is why "equality of opportunity" is talked up. It is, to be blunt, a con.
The problem with equality of opportunity is that it appears to be completely compatible with unlimited material inequality. Indeed, it is promoted as such. The "starting line" metaphor suggests that life is simply a race and that it is a fair race if everyone starts from the same line. But we all know people don’t start from the same place financially, educationally, in terms of health, or culturally. The only way we might get people even near such a starting line is by redistribution of wealth, but redistribution on a sufficient scale is labelled by Hockey as "unfair" to those who have accumulated it.

When the debate shifts from equality to inequality, the role of intuitive popular understanding changes sides: this time it is on the side of those who believe that the degree of inequality is both unfair and increasing. This appears to be not only the view of the majority of people in Australia, but of the majority of people in the world.

The history of welfare in Australia has always been a changeable mix of private and public provision, but the recent enthusiasm by neo-liberal governments for a greater reliance on charity (and personal responsibility) is a remarkable turn back to the darkest days of the 19^th century and the "deserving" and "undeserving" poor. Charity was then a creator and marker of class division: the "givers" were morally superior and the "takers" were morally inferior. Conservatives thought it instrumentally useful that the takers of charity should feel shame. Apparently they still do.

When the sales force of the federal government employs the terms "lifters" and "leaners" it is drawing on just this type of retrograde 19^th-century imagery. It is not surprising they are finding a budget based on such social divisiveness hard to sell. Australians generally regard themselves  as lifters, and very capable ones. But, like the Diggers in London, we also believe, that after we have fought hard, or been injured, or are just plain tired from a lifetime of lifting, we have the right to lean.
Dr Bill Garner is a Research Associate at the School of Social and Political Sciences at the University of Melbourne.

Read more here

Is our market getting a bit toppy?

Close to previous (though not record) highs.  Overbought.  And results season coming up, which is likely to be a bit soggy.