If you have been into your local shopping mall and wondered why the prices of some goods like electronics and basic clothing are going down, while the prices of other things like haircuts and restaurant meals are going up, then you have noticed something fundamental about our economy. Australia is not one, but two economies. And they are dangerously misaligned.
If you walk into JB Hi-Fi or Just Jeans you are standing in the heart of the "traded" economy. This encompasses all the goods, such as clothes, toys and electronics, that can be shipped across national borders. Inflation in this part of the economy is very low. To find out why, just check the label on any of the products in these stores and read the words "Made in China". More than 80 per cent of Australia's clothing imports and 30 per cent of our electrical goods come from China and prices have been falling every year by as much as 2-3 per cent.
If you walk over to have your hair cut, buy yourself some lunch, or drop your kids off at child care you have moved into the "non-traded" economy. These are the goods, and primarily services, which cannot be shipped across borders and so must be provided by Australians. Inflation on many of the goods in this economy is running much higher at 4-5 per cent......
If you want to thank someone for your low interest rates in the past decade, thank China......
Second, Chinese wages are soaring as the supply of new labour to its factories begins to dry up. Population controls, increasing educational levels, and a slowdown in rural to urban migration have restricted the supply of new low-skill labourers to Chinese factories. As a result, wages of urban workers have risen more than 15 per cent in the first half of this year. China has the beginnings of its own skills shortage.
Third, China's government is starting to push up export prices. In June this year, Chinese bureaucrats slashed export subsidies. In 2005 the currency was partially floated leading to an appreciation of more than 10 per cent, which made exports more expensive for foreigners.
All this is bad news for Australian inflation and interest rates......
The roots of Australia's present problem stem from the mining boom that has made Australians much richer over the past decade, but also produced unintended side effects. Cashed up Australians have been using their new wealth to shop for more goods. Greater demand for imports has pushed up our trade imbalance while greater demand for domestic goods has created inflation. In a perfect economy, increased demand for domestic goods and services should be a good thing, which stimulates our economy to produce more. But after years of ignoring capacity constraints and skills shortages, the Australian economy is approaching its maximum production capacity. As a consequence, growing demand is just pushing prices up and creating an inflation headache for the Reserve Bank.
Hmm...
My thoughts?
Yes it kinda sux that everything is made in China now, not only in Australia but many other countries as well. And if they are not made in China they are made in India, Pakistan, Indonesia or some other 'poor' country. When I want to buy gifts for people overseas it is so hard to find something that is useful, nice, decent, and "made in Australia" but doesn't cost the earth. When I was a kid in the 1980s nearly everything was made on home soil. Why I say it 'sux' is because although it's cheap to produce it's still not that cheap to buy in many instances, particularly brand name goods/clothes.
However, I guess it's good for China's progress and economy but will it just end up like Taiwan and Hong Kong? I also remember as a kid that many things were made in these two 'countries' but now that they have prospered and wages have been raised and standards of living it is no longer that cheap to produce goods there. So will we get to the stage where labour is not that cheap in China and therefore prices of goods will not be that low? What will happen then?
As for the prices of restaurant meals, haircuts and any sort of labour? Yes it's a joke! Australia is not that cheap for these things and it probably only appears cheap to Americans and Europeans due to the exchange rate. UGH. The prices of those things really depress me and really makes living in Shanghai so much more bearable when those things are dirt cheap here. Incidenty, my hubby loves the hairdresser across the road from our apartment and he pays just 10 RMB ! (that's $1.50 Australian).
Re the economy, I guess the bubble had to burst at some point. It is depressing to think of rising interest rates when houses are already so unaffordable (esp. in Sydney). UGH!
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