Economic denial continues

America I think has tended to accept what's happening fairly well, albeit that there is some naïve hope focused around the new president; in the UK, denial about the crisis mainly focuses on denial about how long it'll last, but there's been a move from imagining it'll be a one-year thing to a more realistic 2–3 years. In Australia, however, denial continues. The Sun Herald yesterday led with a story about how NSW was in recession – but wouldn't be for long. The state government has now retorted that NSW is not in recession at all. The point is really not whether NSW is in recession or not, but rather that sooner rather than later the entire Australian economy will be in a state of collapse. Australia was sustained through the early noughties recession by the fact that primary production remained robust, in particular with there being good harvests, and a lack of exposure to hi-tech industry. Every significant segment of the Australian economy is today rampantly exposed, however. Primary production is primarily geared towards an Asian market that is in collapse, driven as it was by production for the US market primarily. The very significant financial services sector is in itself a sick economic segment. The tourism sector is dependent on overseas visitors who can easily not come to Australia. These are the three segments where the recession will start. The construction industry has already died in the arse, and the housing bubble is due to burst any minute once job losses feed through into forced sales and repossessions. The biggest Australian secondary industry, automotive, is highly prone to recession as it's easy for people and companies not to buy new cars. The education sector will be one of the last to go, with Asian students being unable to afford to come here in such numbers, and more importantly cease to be so interested in immigrating to Australia with the Australian economy in recession. With this goes the demographic increase that is in itself a driver of the Australian economy, particularly construction.

As I argued elsewhere some years ago now (3.5 years ago, I think), the Australian economy is a house of cards in which any slipping element can make the whole thing fall over. There is no way this precarious structure can weather the current international economic maelstrom.

Fiscal stimulus – Australian style

I note that the Sydney housing market is not behaving like it should giving the looming tide of economic depression – that in fact it remains buoyant, at least as reported by the Herald, a paper which is known for spruiking real estate, however.

Still, there are important things to note here. One is the giant injection of federal money into housing in the form of the increased first homebuyer's grant. I'm tempted to see this as a bailout of the speculative buyers and builders who are currently holding the properties that the first homebuyers will buy, and who are otherwise sitting on unsaleable houses. It is of course obviously also a subsidy to people to buy houses, but this in fact depends on the real value of houses, which is fairly difficult to determine. It's quite possible that in the longer term even with the grant, especially in more expensive properties where the grant is a relatively small proportion of the purchase price, that the homeowners will be left out of pocket in time.

The fundamental driver of any housing market is population growth. In recent times we've seen a massive additional impetus to it in the form of the wealth effect caused by cheap credit, the additional employment seen in the wealth-effect economy, and the high salaries in certain sectors that accompanied it, and then a further major impetus in the form of speculation. The wealth effect one can expect to now disappear – this includes the drying up of cheap credit, rising unemployment and lower household incomes. Speculation worked on a perception that property prices would just keep rising, and in current circumstances has itself largely dried up. This all spells a crash in housing prices. I doubt population growth will hold up either – the collapse of the economy will likely reduce immigration, a major component of Sydney's population growth, and may even result in increased emigration.

The real wild card here is what the government will do. The Australian government is still enamoured of the wealth-effect economy like so other governments, and is trying to jump-start it again, an attempt that may have short-term success, but cannot have long-term success. The value of those grants are being built into the national debt and will have to be paid off by the battlers they are apparently helping, so this 'free money' is rather illusory.