Tag Archives: Economics

Mopping up after the LNP

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The incoming Labor government in Australia is currently enjoying a post-election honeymoon period. And while the new Prime Minister has spent about as much time overseas as he has been at home, there is sense that domestically, something has changed under Mr Albanase.

First, the strident, discordant and caustic tone of federal politics is subtly being dialled down, even if much of the same partisan rhetoric remains. Second, it has been suggested that Mr Albanese is seeking to evoke the spirit of Bob Hawke rather than looking for inspiration from either of his immediate ALP predecessors. Both Kevin Rudd and Julia Gillard were technocrats (rather than being natural politicians) and neither of them enjoyed a solid or stable power base within their own party (hence, they were both rolled while in office). Third, there does not appear to be any radical departure from the previous LNP administration, apart from a commitment to an indigenous voice in Parliament, a plan to establish a federal anti-corruption commission, and a greater focus on renewable energy.

Of course, the new administration faces a number of challenges in the budget deficit and in key areas of economic activity, most of which they have inherited from the outgoing LNP government. Federal largesse (in the form of industry subsidies, public grants, welfare payments and pandemic handouts) is under pressure. The era of “cheap money” is coming to end as we witness higher inflation, lower unemployment, skills shortages, and a very mixed set of economic results. Interest rates are on the way up to try and prevent parts of the economy overheating, and are designed to reduce both borrowing and retail spending. But there is a risk that higher interest rates will result in a decline in house prices and an increase in mortgage stress; and reduced discretionary consumer spending may dent employee expectations of wage growth. Despite the low level of unemployment, there can be no reasonable hope of higher wages without an accompanying increase in productivity. Perhaps the issue is that too many people have fewer hours of employment than they want or need, while those already in full-time employment seek to maximise the amount of work they have. Or productivity gains are difficult to achieve in sectors where wages are the biggest input cost, or where operating margins are already very thin, or where investment in technology has been lacking.

Despite the increase in domestic travel and tourism during and since the height of the pandemic in 2019-21, we should remember that domestic borders were also closed for extended periods. As a result, local tourism was hit hard, and even as things started to open up again, the hospitality industry struggled to find staff or was unable to operate economically due to capacity limits – and a lot of small operators haven’t come back.

I would expect to see bankruptcy numbers to rise – especially among sole-proprietors and SMEs (the latter of whom, in aggregate, account for the bulk of employment by headcount). This is always a lag economic indicator, given the time it takes for insolvencies and liquidations to work through the system. Despite the overall increase in the number of business in 2020-21 (see table below), 93.0% of businesses had turnover of less than $2 million, and 28.7% of businesses had turnover of less than $50,000. There was a 12.5% increase in businesses with turnover of less than $50,000, and only a 0.5% increase in businesses with turnover of $5 million to $10 million and $10 million or more. Given that 81.7% of exiting businesses had turnover of less than $200,000, there is a likelihood that more businesses will go under. This period is going to be especially challenging for sole traders and SME owners who typically mortgage their principal home to fund their business. The next ABS business entry/exit report in August will be very interesting.

Past stimulus packages have been spent on household goods (computers, mobile phones, HDTVs, etc.) that aren’t manufactured in Australia; or put towards the mortgage; or saved for a rainy day – and it’s highly likely a similar pattern emerged with the recent pandemic-related measures. All of which means their net effect on the domestic economy and the balance of payments was probably negligible. Sure, during the pandemic some consumer spending was diverted from things like overseas travel towards domestic purchases, but recent data suggests consumers are cancelling their internet streaming services and curbing their on-line shopping (in part because they are no longer working from home).

During the federal election campaign, one of the few areas of economic “policy” that both ALP and LNP ventured was the promise of financial incentives for first-time home buyers. The idea being, I suppose, helping people onto the property ladder enables them to establish long-term household wealth, while taking some pressure off the rental market. Although there has been a softening in city house prices, price increases in some regional areas have more than compensated for those recent declines (thanks to an urban exodus from cities like Melbourne and Sydney). If you’ve just paid at the top of those regional markets, and now face interest rate hikes (as well as coming off introductory fixed mortgage rates), I’m sure this will bring a new layer of mortgage stress.

Finally, it’s still not clear where the wage growth will come from (apart from a lift in the minimum wage?). Businesses (especially SMEs) that struggled during lock-down won’t easily be able to afford pay rises, and the skills shortages are in many areas where there is a lack of local talent, so increased skilled immigration quotas may actually depress salaries. Something of a vicious circle.

Next week: Literary triggers

Fear of the Robot Economy….

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A couple of articles I came across recently made for quite depressing reading about the future of the economy. The first was an opinion piece by Greg Jericho for The Guardian on an IMF Report about the economic impact of robots. The second was the AFR’s annual Rich List. Read together, they don’t inspire me with confidence that we are really embracing the economic opportunity that innovation brings.

In the first article, the conclusion seemed to be predicated on the idea that robots will destroy more “jobs” (that archaic unit of economic output/activity against which we continue to measure all human, social and political achievement) than they will enable us to create in terms of our advancement. Ergo robots bad, jobs good.

While the second report painted a depressing picture of where most economic wealth continues to be created. Of the 200 Wealthiest People in Australia, around 25% made/make their money in property, with another 10% coming from retail. Add in resources and “investment” (a somewhat opaque category), and these sectors probably account for about two-thirds of the total. Agriculture, manufacturing, entertainment and financial services also feature. However, only the founders of Atlassian, and a few other entrepreneurs come from the technology sector. Which should make us wonder where the innovation is coming from that will propel our economy post-mining boom.

As I have commented before, the public debate on innovation (let alone public engagement) is not happening in any meaningful way. As one senior executive at a large financial services company told a while back, “any internal discussion around technology, automation and digital solutions gets shut down for fear of provoking the spectre of job losses”. All the while, large organisations like banks are hiring hundreds of consultants and change managers to help them innovate and restructure (i.e., de-layer their staff), rather than trying to innovate from within.

With my home State of Victoria heading for the polls later this year, and the growing sense that we are already in Federal election campaign mode for 2019 (or earlier…), we will see an even greater emphasis on public funding for traditional infrastructure rather than investing in new technologies or innovation.

Finally, at the risk of stirring up the ongoing corporate tax debate even further, I took part in a discussion last week with various members of the FinTech and Venture Capital community, to discuss Treasury policy on Blockchain, cryptocurrency and ICOs. There was an acknowledgement that while Australia could be a leader in this new technology sector, a lack of regulatory certainty and non-conducive tax treatment towards this new funding model means that there will be a brain drain as talent relocates overseas to more amenable jurisdictions.

Next week: The new productivity tools

Corporate purpose, disruption and empathy

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There’s been a renewed debate recently, about corporate purpose: why do companies and organisations exist?

Partly this existential angst comes from a sense of feeling redundant – sunset industries, declining and non-existent markets, outmoded technology, irrelevant products and services. The whole evolutionary model, survival of the fittest, etc.

Partly it comes from a shift in the balance of power – from access to resources, markets and technology, to the future of work offering people more choices in the ways they can generate their living.

Whether companies face disruption or decay, their purpose has to change and adapt accordingly – look at how Kodak is backing a project to issue cryptographic tokens to help professional photographers track the use of their IP.

Equally, employees are more invested in working on interesting ideas, and more interested in working for businesses that align with their values, rather than buying into a corporate purpose. So it’s as much about the “how” of an organisation as much as the “what” and the “why”.

I sometimes find it hard to feel much empathy for companies or industries that become outmoded – although I can feel some empathy for the people who lose their jobs as a result. However, if the political and economic response to declining industries is to focus on job losses (or job subsidies), it tends to overlook where the new opportunities are actually coming from – even though this growth does not always offer traditional jobs or work/career options. Equally, individuals need to adapt to the changing work environment – no-one can be sure of a “job for life” anymore, no matter how much some of our political leaders would like to think otherwise.

If we look at the traditional function (not the same as purpose) of many companies, it was to harness certain resources in the pursuit of creating assets or wealth. So, companies were once really good at sourcing and managing financial capital, human capital, and intellectual capital. They were even “better” at this if they had monopolistic access to, or operated within, highly controlled and tightly regulated markets.

Now, of course, thanks to disruption and other forces, companies no longer have a monopoly on these resources, as many markets have become outsourced, open source, disintermediated or decentralised. Rather than being formed by shareholders and other stakeholders for long-term ventures, “companies” can just as easily be a collective of self-forming, self-governing and self-aware resources that combine for a specific objective, for as long or short a time as the objective or enterprise requires. And technologies like Blockchain, digital assets and smart contracts will determine how, and for what reason, and for how long such entities will exist, and the resources they will require.

Next week: More musings on ICOs and cryptocurrencies  

 

 

 

 

 

 

 

The arts for art’s sake…

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Last week I wrote about the importance of learning coding skills. This prompted a response from one reader, advocating the teaching of STEM (science, technology, engineering and maths) in schools: “Coding and the STEM subjects are our gateway into the future.” I would agree. But, as other commentators have noted elsewhere, we also need to put the A (for art) into STEM to get STEAM to propel us forward….

Equivalent VIII (1966) Carl Andre (b.1935) Purchased 1972 http://www.tate.org.uk/art/work/T01534

Equivalent VIII (1966) Carl Andre (b.1935) Purchased by Tate Gallery in 1972 http://www.tate.org.uk/art/work/T01534

I recently attended a talk by renowned arts administrator Michael Lynch, as part of the FLAIR art event, where he expressed frustration at the state of the arts in Australia, the lack of a public arts policy, and the associated cuts to government funding. It can’t help that from John Howard onward, we have had a sequence of Prime Ministers who, while not total Philistines, have shown little enthusiasm, appetite or appreciation for the arts. And during Q&A, Mr Lynch referenced the conservative and “safe” nature of so much arts programming as evidenced by the lack of risk-taking and the stale and over-familiar choice of repertoire, although he did acknowledge some arts organisations were doing exciting work.

The debate then shifted to whether we need a new method to evaluate the benefits of a strong arts sector that is not purely dependent on economic terms or financial performance. It was not possible in the time available to come up with a suitable indicator, but I suggest we can derive a range of benefits from putting more emphasis on teaching, supporting and sponsoring the arts. This RoI might be measured in such terms as the following:

  • Enhancing creativity among students will benefit individual problem-solving skills and collective innovation;
  • A healthy arts scene is indicative of a balanced, self-assured and progressive society;
  • Participating in the arts can give people a sense of confidence and well-being;
  • Through art we can learn about culture, philosophy and history – especially of other societies;
  • Giving people the means to express themselves through art is an important outlet for their skills, talent and interests.

We agonize about the amount of investment in our Olympic athletes in pursuit of gold medals, and whether the money can be justified (goodness – Australia only just made the top 10!)  But no-one (yet) has suggested it’s not worth doing, even if we don’t win as many medals as is often predicted. And of course, together with the wider popular entertainment industry, professional sports attract more dollars, airtime and support through sponsorship, advertising, broadcasting rights, gambling revenue, club memberships and merchandise than the arts could ever hope to.

Part of the challenge lies in the popular notion that arts are either elitist, worthy, self-important, or simply frivolous – which makes it harder to build an economic case for the arts, but which can also lead to the worst kind of cultural cringe. Also, if the arts are really doing their job, they hold up a mirror to our society, and we may not like what we see. Populist politicians can’t afford to be associated or identified with such critiques – either as the targets or as de facto protagonists – so would they rather be seen shaking hands with gold medalists (or attending a Bruce Springsteen concert…) than maybe attending a cutting-edge performance by The Necks?

Next week: The latest installment of Startup Victoria pitch night