Category: economy

Tasmania and the travelling circus

Big events are good for giving a local economy a short term boost, but how does Tasmania build its economic foundations?

“We bring in almost everything,” says V8 Supercars director Mark Perry as he guided journalists around Launceston’s Symonds Plains racing track.

Everything Mark showed us – a fleet of trucks, communications equipment, hospitality tents and the racing teams themselves would be packed up on Sunday night, shipped to Melbourne and flown to New Zealand for the next race.

The V8 Supercar management are very proud of their work, and they should be given the massive task they have, but it exposes a weakness in the Tasmanian economy in that almost all the high value employment and equipment has to be flown in.

Quiet times in downtown Launceston

Arriving into Launceston on the Friday before the races, it’s interesting how little hype there is around the event. In Sydney, San Francisco or Cannes there would be banners and flags around the city welcoming visitors, in Launceston there’s almost nothing despite the race meeting being one of the state’s biggest events.

It was also surprising how there were no downtown events to complement the main attraction.

Almost every major sporting event from the Olympic Games and FIFA World Cup to the AFL Grand Final and Australian Open has some inner city satellite venues with big screens for the locals who can’t make it to the stadium.

Having those satellite events adds to the buzz and hype in the host city. Something that downtown Launceston needs at 7pm on a Friday night.

That lack of support by the community is notable, particularly in light of the $600,000 per year the cash strapped Tasmanian government pays in subsidies for the V8 Supercars.

I’m against government support for events like these, but if that money is going to spent it may as well be spent properly to maximise the economic benefits.

Subsidies like this would be even better if they were part of some grander economic plan, but like all the payments given to the film production, motor manufacturing and other industries, they are based more on populism than any strategy – the politicians may as well be giving free beer out in Launceston’s main street.

Why the community support is so tepid for the Supercars event is so tepid is something I’m going to be exploring in the next few days as I meet various business leaders in Launceston and Hobart to hear how the state is positioning itself in the 21st Century.

In the meantime, the V8 Supercars “travelling circus” has moved on, hopefully Tassie will have some more long term jobs to show for it.

Paul travelled to Tasmania and the V8 Supercars courtesy of Microsoft Australia

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Australia and the Chinese Mexican stand off

As China rebalances its economy, a new wave of change is about to sweep global trade.

Twenty years ago visitors to Sanya on the south coast of China’s Hainan Island could find themselves staying at the town’s infectious diseases clinic, converted into a backpackers hostel by a group of enterprising doctors.

The Prime Ministers and Presidents attending of Boao Asia Forum this week won’t get the privilege of staying at the infectious diseases hospital as Sanya’s hotel industry has boomed, bust and boomed again following the island being declared a tourism zone in 1999.

Instead, their focus is on the pecking order of nations and for the Australians the news is not good. As the Australian Financial Review reports, the Aussies have been seated well below the salt by their Chinese hosts.

On the Boao list, Australia is outranked by Brunei, Kazakhstan, Myanmar, Zambia, Mexico, and Cambodia – even New Zealand Prime Minister John Key gets higher billing.

Central and South East Asian countries make sense as countries like Myanmar and Kazakhstan are China’s  neighbours with strong trade ties.

That the Kiwis have been given priority over the Aussies by the Chinese government is not surprising in light of this.

An unspoken aspect for the Australian attendees to the Baoa conference is how long Canberra’s political classes can continue their forelock tugging fealty to the US without offending the nation’s most important trading partner.

Mexico’s entry on that list could be one of the most important with consequences for Australia and the world.

During the 1992 US Presidential campaign candidate Ross Perot coined the phrase “the great sucking sound” in his opposition to the North American Free Trade Agreement and the risk of losing jobs to lower cost Mexico.

As it turned out, the giant sucking sound was China – it turned out China’s admission into the World Trade Organisation had far greater consequences for the United States and Mexico than NAFTA.

Mexican manufacturing was one of the greatest victims of China’s rise as US companies found it easier to subcontract work to Chinese factories rather than setup their own plants in Mexico.

Now China is finding its own costs creeping up and labor shortages developing and Mexico is attractive once again. The Chinese and Mexican governments have been working on their relationships for some time.

As manufacturing moves out of China, the shifts in world trade we’ve seen in the last two decades are going to be repeated, this time with Chinese moving up the value chain the lower level work moving to Mexico and other nations.

The leaders at the Baoa conference have their work cut out for them in dealing with another decade of global change.

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Beer and 3D printing lead a Belgian town into the future

One town in Belgium shows how new industrial hubs are developing around emerging technologies like 3D printing

While many cities and states are fighting to subsidise declining businesses others are becoming hubs of future industries. The story of Leuven and 3D printing is one of the latter.

A great article and accompanying presentation from Reuters illustrates some of the possibilities with 3D printing technologies.

Most of the article revolves around the Belgian company Materialise whose CEO, Wilfried Vancraen, has been a pioneer in 3D printing.

An interesting upshot of Materialise’s development is how the company’s hometown, Leuven, is promoted by the firm as the ‘world capital of beer and 3D printing.’

Belgian town Leuven is promoted as the beer and 3D printing capital

Calling yourself the ‘World Capital of Beer’ is a big – and one suspects risky – call in Belgium so it’s not surprising that the town itself doesn’t use the tagline.

Being the world capital of 3D printing though does have some allure of Leuven being able to build itself into one of the world’s hub for the new technology.

Those hubs are a feature of every industrial revolution – whether it’s Silicon Valley and the manufacturing centres of South East China today or the English ironworking and cotton milling hubs of the 18th Century.

For governments looking at attracting job creating industries, instead of desperately trying to attract the old industries of the 20th Century it might be worthwhile to consider what the community has to offer the business leaders of this millennium.

Leuven may or may not become one of the world hubs of 3D printing, but at least the city has a chance – those bidding for car factories, movie productions or prisons are destined to decline even if their bids succeed.

Beer pouring image courtesy of dyet and sxc.hu

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Australia welcomes the multi generational mortgage

Australia starts to repeat Japan’s experience with multi generational mortgages. With a twist that might be more debilitating than the Japanese lost decades.

At the height of the Japanese property boom in the 1980s, the hundred year mortgage came into being.

Pushing payments onto children and grand-children was the only way home prices could continue to rise once they hit levels which the average Japanese worker could ever afford with a more traditional twenty or thirty year mortgage.

Twenty five years later Australia finds itself in a similar position as parents guarantee their childrens’ mortgages.

Repeating the Japanese mistake

While the Japanese looked to sticking their mortgages onto their kids and grandkids, Down Under the kids are fighting back and getting mum and dad to underwrite their unaffordable loans.

This weekend’s Sydney Morning Herald features in its property section the story of how Sharon and Graeme Bruce guaranteed their son’s and his fiance’s mortgage in Sydney’s inner suburbs.

While the story isn’t clear on the size of the deposit (which isn’t surprising given the SMH’s shoddy editing), it appears the Bruces’ have guaranteed around $300,000 so his son and future daughter-in-law can grab a five bedroom, 1.45 million dollar mansion.

One wonders what great businesses Matt and Hannah could build if mum and dad were prepared to stump up a similar amount to invest in a start up?

Australia’s property obsession

Sadly we’ll never know – in Australia, the smart money gets a job, pays off a mortgage and accumulates wealth through investment properties. What cows are to African tribesmen, negatively geared units are to the Australian middle class.

The hundred year strategy hasn’t worked too well for Japan, with a declining population those mortgages entered into a boom level 1980s values now don’t look so attractive and are one large reason for the nation’s lost decades.

In Australia, things aren’t likely to work so well either. The Baby Boomers and Lucky Generationals – those born from 1930 to 1945 – guaranteeing their kids’ and grandkids’ mortgages are relying on ever increasing property prices.

This is understandable given that few of them have any experience of long term stagnation, let alone decline, of property values but it leaves them incredibly exposed should the Aussie housing market slump.

Can an Aussie property decline happen?

Many Australians, particularly those with vested interests, maintain such a decline can’t happen but the prospects aren’t good as the SMH story shows;

The couple had attempted to buy a small terrace in Newtown but kept getting pipped at the post by other young professional couples. At a higher price point they had no competition.

Despite his parents’ generosity he said he would still need to rent out a few of the rooms to help pay for the mortgage.

So Matt can’t afford the mortgage. That’s not good starting point and one that could cost his parents dearly, which they don’t seem to care about much.

”Obviously my dad guaranteeing the loan was the only way we were going to purchase this,” Mr Bruce said. ”You need to have a 20 per cent deposit otherwise the banks want you to pay insurance … it’s a bit of a rort really.”

It’s fair to call mortgage insurance a rort – as it certainly is – but its purpose is to protect the banks should a mortgagee default and the financiers find themselves out of pocket.

With Matt’s parents getting him out of paying that insurance his bank has much better default protection, equity in his parents’ property.

Guaranteeing risk and misery

I’m not privy to the finances of Sharon and Bruce, but most of their contemporaries can ill afford to lose several hundred thousand dollars in home equity in their later years.

That is where Australia’s multi-generational mortgages could turn very nasty, very quickly as older Australians find themselves having to deliver on the guarantees they gave on behalf of their over committed offspring.

In Japan, it’s taken a long time for the population to realise their national wealth has been squandered on twenty years of propping up unsustainable property prices and economic policies.

One wonders how long it will takes Australians to realise the same has happened to them and what the political reaction will be.

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Employment’s changing face

Is it management’s and white collar workers’ turn to deal with the change of contracting and business process outsourcing?

Last Thursday recruitment company Talent2 launched its 2013 Market Pulse Survey looking at the employment trends across the Asia Pacific.

According to the survey, things are looking good with 61% of businesses across the Asia Pacific forecasting growth and 45% expecting to hire more staff.

However there’s an interesting underlying theme to the good news, employment is changing in large organisations.

One of the give-aways is the fact that while nearly two-thirds of businesses expect to grow in 2013, less than half intend to increase staff. Businesses are doing more with less.

Part of this is because of increased automation. Despite the headlines, productivity is increasing in workplaces – particularly offices – as technology automates many business functions in fields like logistics and workforce management.

Another aspect driving the lack of employment is outsourcing, Talent2 say the proportion of Australians working as full time employees dipped below 75% in 2012 with a four percentage point drop over the year.

With more businesses contracting work out, one could expect the number of sole proprietors to be increasing. However this seems not to be the case.

The number of non-employing Australian businesses

According to the Australian Bureau of Statistics, the number of sole traders is barely moving – between 2006 and 2011 the number of “non-employing Australian businesses” only increased 5% while the population grew over 8%.

This implies the proportion of contractors in the workforce is actually shrinking.

Much of this is probably due to the work going offshore, particularly to Business Process Outsourcers (BPOs) in countries like the Philippines, Malaysia and Sri Lanka.

Saturday’s Australian Financial Review looked at what the BPOs are doing in the Philippines and they aren’t carrying out the call centre and basic clerical work that’s made up most of the outsourcing over the last twenty years. Now it’s management roles that are going offshore.

The bigger issue confronting Australians, however, is not call centre workers being relocated to the Philippines. It’s low- to mid-level professional jobs, being moved out of companies, accounting firms and law offices.

Legal outsourcing has been growing for a decade as large law firms have moved many of their para-legal and routine tasks offshore to countries where legal graduates are plentiful but work at lower rates than their western colleagues.

An interesting aspect in legal offshoring is that much of the work that was done by young lawyers has now gone to overseas contractors, which probably means there’s going to be a shortage of experienced legal practioners in the medium term. This is going to have profound consequences for law firms and their partners.

It’s also going to mean law and associated degrees are going to be less popular with school leavers as career prospects dwindle.

The biggest impact though is for managers – we’ve grown used to the assumption that management jobs stay at head office while the lower level jobs go to the lowest cost provider.

Now is those lowest cost providers are offering good quality management staff along with support desk and call centre staff.

During the restructurings of the 1980s and 90s, it was blue collar workers who were the most affected by change. Now it’s the turn of the office workers and managers.

It will be interesting to see how many of the people who thought they were secure in their roles deal with the uncertainty they now have. For some it’s going to be a tough decade.

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Now may not be a good time to buy Melbourne property

Why do monster skyscrapers mark a looming economic downturn?

There’s plenty of indicators that can be used to predict the health of an economy

While my favourite is the mini-skirt index, the most reliable is when rich folk start building huge skyscrapers.

Whenever developers propose a hundred storey building it marks the top of the property cycle. Should they get to actually build the thing, you can be guaranteed a nasty economic downturn is about to hit.

The Skyscraper Index’s historical record

This track record was set with the very first megatower – the Empire State building was started just before the 1929 stock market crash and completed as the great depression tightened its hold on the United States.

Forty years later New York’s ill-fated World Trade Center opened just in time to welcome the 1973 oil shock and subsequent recession.

A more recent example is Dubai’s Burj Khalifa, the world’s tallest building which was topped out in time for the city’s property crash and economic rescue by neighbouring Abu Dhabi.

In Australia, the most notable downfall was 1980s entrepreneur Alan Bond who planned to build a 140 storey tower on the World Square site opposite Sydney’s Town Hall.

The site was excavated but Bond went broke before work started and the hole remained for over a decade until a more modest 40 storey tower was built on the site.

Australia 108

So the news that property developers want to build a 108 storey tower on Melbourne’s Southbank should worry the Victorian government and unsettle the state’s property owners.

What’s always notable about these super skyscrapers is the garishness of the project. While Australia 108 won’t match the Burj for sheer Las Vegas gaudiness, it will feature the ‘Star burst’, a star-shaped Sky Lobby and hotel at the top of the tower.

Why the Skyscraper index works

The reason why 100 storey buildings are such a reliable economic indicator is because they illustrate there’s too much dumb money in the economy. It rarely makes sense to build such tall buildings.

Designing and building high rise buildings is complex and expensive – the higher you go, the more construction challenges there are as this Popular Mechanics article describes.

Skyscrapers are subject to the law of diminishing returns as the taller the building is, the more space that’s needed for services like elevators, air conditioning, water supplies and fire protection which reduces the landlord’s rentable floorspace on the lower levels.

When a building reaches a hundred storeys, there’s little space available on the lower floors for paying tenants. So the economics don’t add up.

Builders, property developers and financiers know this so when they start proposing projects that don’t make commercial sense it’s a fair indication the locals are gripped with irrational exuberance and Adam Smith’s invisible hand is going to deliver a short, sharp slap to the back of the economy’s head.

Does it matter to Australia?

And so it is in Melbourne, which is going to be interesting to watch as South East Queensland is the only Australian metropolitan area to suffer a prolonged property downturn in the last twenty years.

Hopefully Melbourne’s woes won’t affect the rest of the Australian economy but given how much the nation has invested in property and the stratospheric debt levels to service that speculation, it may well be that the rest of the country will follow Victoria.

Winning the next election might not be a good thing for Tony Abbot and his followers who genuinely believe a Liberal government will deliver a magic pudding to the home of every dinky-di Working Australian.

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Graphs, damn lies and the middle class

Graphs can give us a misleading picture of our society, particularly when we’re looking at the middle classes

Graphs are great for illustrating a story, and also excellent at misleading people.

A good example of where a graph can give an incorrect impression is the Sydney Morning Herald’s story Whatever Happened to the Middle Class.

The story is a very good explanation of the predicament Australia’s political classes have put themselves into – exacerbated by their 1950s view of dividing the workforce into poorly paid ‘blue collar’ workers and affluent ‘white collar’ office staff – but it suffers from the selective use of headline graphs.

Viewing the big picture

The first graph shows how Australians are identifying themselves as middle class and the trend looks staggering,

Graph of How Australians see themselves as middle class

Now if we add those who identify themselves as working class, the picture looks even more dramatic with some pretty volatile swings,

A graph showing How Australians see themselves as middle or working class

However if we now add in those who identify themselves as rich, or upper class, we get a better perspective as the entire range is now shown,

Graph showing How Australians see themselves as upper middle or working class

Selective choosing the Y, or vertical, axis will always give an exaggerated view of a trend or proportion. Once we take the full range in we see the real extent of things. It also has the benefit of showing the trends aren’t as volatile as first appear.

Middle class perceptions

When we look at the graph showing the full picture there’s a number of interesting trends and characteristics about Australian society that come out of it which are worthy of some future blog posts.

Most notably is the identification of Australians being middle class as their property values increased.

On this point, it’s worthwhile contrasting the Australian experience with the US, here’s a Gallup poll from last year on how Americans see themselves,

A graph showing how Americans see themselves as upper middle or working class

While the definitions are different – that Americans differentiate ‘working class’ and ‘lower class’ is interesting in itself – it’s clear that the same trend happened in the US with more people identifying themselves as being members of middle class when their property values were increasing.

In 2008 and 9 there’s suddenly a sharp increase in Americans identifying themselves as working class as the property downturn bites. The steady increase in those claiming to be ‘lower class’ from 2006 onwards is worth closer examination.

What this means for Australia

The implications of the US trends is that any Australian politician intending to dismantle John Howard’s middle class welfare state will have to wait until the property market falls before trying to win any popular support.

For this year’s Australian election though, what’s clear is that any attempt to stoke the fires of class warfare is going to fail dismally in the outer suburban marginal seats so coveted by both parties.

We’re going to see a lot more selective graphs during the course of this year, it’s worthwhile taking time to look at them closely. The stories may be different, and a lot more nuanced, than the headlines tell us.

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