Mr. Stevens is increasingly worried about the end of the resource boom in Australia. He points out that resource-sector investment rose from a historic level of about 2% of GDP to a peak of 8% of GDP recently, and is now likely to decline. An analyst points out that this is the first time that the RBA has suggested that the peak in resource investment has already occurred.

What I wonder is, why is it likely to decline? Why is 8% the peak? Is this a forecast based on the Chinese slowdown (in which case, it looks pretty shaky)? That would be incompatible with the fact that Mr. Stevens has been talking about the peak of the resource boom for some time. So, I am wondering: what is the model here? Perhaps some searching on the RBA website will answer the question.

On the subject of Australia, Bloomberg says that the RBA is attempting to “rebalance” the economy away from mining and towards employment-intensive industries. It seems to me that this “rebalancing” concept, which of course is usually applied to China, obscures more than it illuminates. It encourages one to think of the authorities as having the ability to change the sectoral balance of GDP per se. But neither the Chinese authorities nor the RBA has that ability. In the Australian case, the RBA is attempting to offset a peak in resource investment by doing something that it can do: providing monetary stimulus to the economy. That is not, fundamentally, about “rebalancing”. It is about maintaining positive growth.

The PBOC has injected liquidity into the banking system, apparently easing the fears of certain journalists that interbank rates might be allowed to spike again. The best explanation of the previous spike that I have seen was in The Economist: that there was a reported surge of lending at the start of June, to which the PBOC responded, and that the reported surge was the result of a change in reporting — with more lending being brought into the regime — rather than a genuine change in the amount of credit being extended to the economy. If that is so, it makes sense to think that that the PBOC made a mistake, and to forecast that it is unlikely to repeat it.

Let’s have a think about China. Nobody has a clue what is going to happen to the economy next, but I wonder if it would be helpful just to list some themes.

  • The credit intensity of growth is increasing.
  • The same growth level appears to be becoming associated with higher inflation.
  • The growth rate of investment is slowing, probably as a result of government action (much of investment appeared to be government-led, although the huge proportions reported look a little implausible).
  • There is plenty of scope for fiscal/monetary stimulus (the two rather blend together in China).
  • The FT reports that a Mr. Lin has pointed out that China’s GDP per capita at PPP was 21% of that of the US in 2008. China should have years of catch-up growth ahead of it.
  • Yesterday, I read an analyst who said that a 10% rate of GDP growth was not sustainable indefinitely. I dislike this kind of comment, because it is literally true, but some of its possible connotations are false. Smooth growth of 10% QOQ annualised every quarter is probably not possible; growth in the high single digits or double digits, lasting for many years, is possible. Japan had about 27 years of it, from 1946, as my earlier blog post today shows.

Why did NKY fall so sharply after the Japanese Upper House election? “Buy the rumour, sell the fact”? Or perhaps because the possibility of an LDP majority (alone) fell out of the market. That would cohere with my thoughts of 16th July, when I pondered whether an LDP majority would allow Mr. Abe to buy off opposition to Abenomics within his own party with nationalistic policies. The fact that he has to government in coalition with New Komeito makes it less likely that he will be able to implement any changes to the constitution (although it is possible, if you include a referendum; I am not clear on how the system works, but I read this somewhere reputable). That means that LDP lawmakers who oppose the “Third Arrow” of structural reform will not be able to be brought on-side with non-economic measures, and therefore suggests that the Third Arrow will be weaker than some have hoped. That would be consistent with the falling NKY. But it is early days.


  • Pending home sales -0.4% MOM d.e. Jun. +10.9% YOY. The rise in mortgage rates may be partly responsible for the fall. Pending home sales reached a six-year high in May.
  • Japan household spending -0.4% YOY d.e. Jun. The stand-out decline was in housing expenditure, which fell 16.5% in real terms YOY.
  • Japan unemployment 3.9% b.e. Jun. A new post-GFC low. Employment was up 0.5% YOY, while the number of unemployed people was down 9.7%.
  • Japan IP -3.3% d.e. Jun. This reversed the recent two-month rise. Following a decline through the first half of 2012, Japanese IP has effectively been flat for a year.
  • Spain flash GDP -0.1% QOQ Q2. This is the best quarterly reading since Q3 2011. GDP was still down 1.7% YOY.