Australia's economy: A disaster waiting to happen

On Wednesday we were told that the economic figures that came out were stronger than expected, thanks to some mild GDP growth. 

A day later, out come the figures for Australia's trade balance. The data showed that our trade deficit is the worst on record. At no point since 1971, the year these figures go back to, has the deficit been so bad. The deficit is worse than the previous low, which was at the height of the GFC.

That should be setting off alarm bells across the country, because, as far as I'm aware, the world economy is not in meltdown. The world is meant to be recovering, even those economies worst hit that aren't called Greece, and our economy is meant to be doing relatively well. The Treasurer was eager to compare us to the other OECD economies in Question Time yesterday, in order to prove that everything is fine.

So why is our trade deficit so shockingly bad?

Well, not for the first time, we seem to have fallen the resource trap, or as it is now well known as in Canada, the Dutch disease.

Our economy has been working off the back of two things: mining and services. These are the classic symptoms of Dutch disease. To meet the demand for our rocks, labour moved from our lagging manufacturing and agricultural sectors towards mining. Then, as our economy became richer, the increase in spending meant a greater demand for services, thus creating a shift in labour from the lagging sectors towards services. Our stronger currency increases the cost of buying these services as well.

Now the mining boom is well and truly over, and we have absolutely nothing else to make up the deficit.

As you may guess from looking at my profile picture, I rather like colours. There is a great resource which helps visualise how much our economy has changed is the past two decades: it's called the Atlas of Economic Complexity, and it's the work of Harvard University.

Let's compare the economic complexity of Australia in 1995 and 2013 (you can explore the charts in more detail at the links).

1995 exports

2013 exports

You can see for yourself how totally dominant mining has become. At the top you may also notice that the value of exports has increased enormously (although it is no longer as large as it was in 2013). The problem is not that mining in and of itself weakens an economy. Mining is, after all, necessary to provide us with the goods we use daily. The problem is when it becomes an overwhelming force which decimates other industries, leaving an economy in a parlous state when the mining boom ends.

This is not the only problem facing the economy. House prices have continually acted of their own accord, only moving in one direction. Up, and up, and up they've gone, thanks to a mix of low interest rates, tax breaks and deregulated lenders. Buying a home is both easy and expensive, a mix that does not bode well in a fragile economic environment.

But neither the government nor the RBA is particularly keen to do anything to change this situation too rapidly. The RBA is cautious because housing is one of the few areas of growth left in the economy. The government is cautious because any moves may well result in political and personal pain, as not only would the electorate be seriously affected, their own investments would as well.

Housing has become such a safe bet that every man and their dog is willing to buy. Household debt is at record levels, so any change in the situation could well tens of thousands of homeowners over the edge, forcing them to sell and thus causing a rapid drop in the house price. Oversupply of housing would certainly bring down the house price, but the rest of the economy probably comes with it.

Speculation isn't restricted to housing either. The stock market is acting as though nothing is wrong. As long as house prices are increasing, and stock market isn't falling off a cliff, it is easy for those in charge to pretend nothing is wrong. At worst, it just appears to be a somewhat mixed message. But the economic indicators that most impact the person on the street - unemployment, foreign investment (outside housing), growth, wages and the aforementioned exports - are going the other direction. Those in charge will not be able to pretend forever that nothing is wrong, because those the electorate will know that that is not true.

If something is not done soon, we will have a recession, and it may even be more necessary than the last.