The view from the cliff's edge
'Chaney believes we run the risk of another Spain in 10 years' time'. Photo: Reuters
MYER last week released a set of anaemic sales numbers for its latest quarter and all indications suggest David Jones will follow suit today.
There has been talk that green shoots may be emerging in the retail sector. A more realistic read is that the retail environment is not getting any worse, but this is nothing to get excited about.
There have been many false dawns in retail and even the stabilisation that appears to be under way could just be another.
The retail sector and wider economy generally will take heart in the musings of the Reserve Bank board at its November meeting suggesting that interest rate cuts are on the agenda.
There is nothing the retailers enjoy more than a rate cut early in December (other than a rate cut in November followed by another in December) to bolster the confidence of consumers and entice them to open their wallets for the Christmas season.
There is a strong argument to suggest that the RBA should have moved in November and nothing in its reasoning at the time or in the minutes of that board meeting released yesterday make a case for keeping rates on hold.
The RBA's remit is to keep inflation within a band, a manageable level. And this is just where it sits at the moment.
Inflation was a little higher than expected but it is not running too hard. Property markets are stagnant and equity markets are slightly positive. Neither of these indicators are anything to get excited about.
The question is should the central bank be getting ahead of the curve and taking into account the looming prospect of a rise in unemployment - in part brought on by a slowdown in business investment.
The almost universal view is that over the next year or two years capital expenditure growth by businesses will taper off or, worse, grind to a halt.
Players inside the resources industry have made it abundantly clear that we are standing on the edge of the capex cliff.
Those operating in coal and iron ore say that no major new projects will get a green light in the face of falling prices. Projects already in train will be finalised but no major new ones will be approved.
In the LNG space the time frames vary. It could take a little longer.
According to Woodside chairman Michael Chaney, the capex will peak around 2015 or 2016.
But he has a more dire prediction for the Australian economy generally. He takes the view that while we have experienced an increase in our terms of trade, employment and investment, these have masked falling industry-wide productivity levels.
Once business investment and trade drop off we will be exposed because of the lack of productivity growth.
This is the message echoed by many in Australian industry and one that has been dead batted by the government. Companies are crying for the quick fix of monetary and fiscal policy but neither can provide us with the cure-all.
The government's response is to promise a budget surplus - which is laudable as an outcome but not the solution.
Chaney joins the chorus of longer-range opinion that does not argue against a fall in interest rates but says the economy has bigger issues that this cannot fix.
He runs with the broader field of economists saying that if wages run ahead of inflation the difference must be made up in productivity.
If not, he believes we run the risk of being another Spain in 10 years' time.
The RBA makes mention of the potential risk of the capex cliff - it can hardly be ignored.
But the effect this will have on employment levels is one that the RBA must be aware of but does not need to deal with yet.
It will feed into the levels of overall economic growth but not in the short term.
The RBA noted that the policy changes in the government's midyear economic update could subtract between 0.75 and 1.5 percentage points in economic growth. This was not enough to worry the central bank into easing monetary policy.
The Reserve Bank works on the problems that are at its doorstep rather than those on the one- to two-year horizon.
It takes comfort in the fact that the US economy has not deteriorated further and that financial markets appear to have settled for the time being in the absence of more negative news out of Europe.
This buoys capital markets in the short term, but to suggest Europe's economic ills have been solved is short-sighted in the extreme.
There are numerous challenges facing the Australian economy - most of which have been masked by the growth in the resources sector.
Once the mining boom tapers off they will be exposed and they will need to be dealt with, in part, through fiscal and monetary settings.
In the meantime, the Australian economy will continue to move closer to this business investment cliff.