Tuesday's Top 10 with NZ Mint: Australia's growth pothole; America's new fiscal crisis deadline of March 1; China's deepening shadow finance system; 'Peak toil' in China; Dilbert

Here's my Top 10 links from around the Internet at 10 am in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #5 and #6 on the demographic drivers in Europe and China. Think about them a bit and your head will hurt.

1, Australia's growth pothole - Deloitte Access Economic's quarterly business outlook released yesterday is forecasting a growth pothole for the Australian economy later this year after the mining boom peaks.

This is another one of those headwinds the government is talking about.

As jobs growth slows in Australia, the escape valve for surplus workers in New Zealand is closing.

That will put more pressure on unemployment here later this year and into next year. We've already seen a slowdown in outward migration to Australia.

The problem for Australia is the mining boom there is slowing just as central and state governments clamp down on their spending.

Here's Deloitte Access Economics:

"Australia's economy needs a new growth engine," it says, warning that the "Godzilla-like strength" of the Australian dollar is keeping a handbrake on recovery in non-mining parts of the economy, despite lower interest rates.

This follows an exclusive warning to News Limited last week from two Reserve Bank board members, Heather Ridout and John Edwards, that a fresh wave of investment in infrastructure and skills is needed to fill the gap created by the receding mining boom.

According to Deloitte: "The mega-mining construction projects which accounted for much of Australia's production growth in recent years are hurtling towards a peak...So the rest of the economy needs to fill a potential pothole. But Federal and State Governments cuts have deepened that pothole."

2. China's shadow brokerages - Keep an eye on China's growing debt being shuffled and hidden away into its shadow banking and broking systems.

One of the inevitable risks of running your economy with monstrous investment is that a large chunk of it can't wash its own face. This builds up yet more debt as the debt and interest payments grow faster than the returns.

Here's the FT with a nice piece on how China's brokerages have been shuffling debt off into shadowey places.

Chinese securities brokerages have emerged as a crucial new link in the country’s shadow banking industry, a development that underscores how financial risks are spreading more widely in China. People familiar with brokerages say they got started in shadow financing around the middle of last year, taking control of funds that banks wanted to remove from their balance sheets.

New industry data confirm this development and reveal a dramatic increase in such activity in the fourth quarter. For 2012 as a whole, shadow financing via brokerages appears to have increased almost 600 per cent.

“In August we were told to start allocating more funds to securities companies because that channel was fully open,” said a manager with a midsized bank who has been directly involved in shifting assets off his bank’s balance sheet.

3. The fiscal cliff is back sooner than we think - It looks like March 1 is shaping up as yet another deadline in the financial markets around the US budget mess.

Republican Leader Paul Ryan said over the weekend that Republicans were willing to allow the triggering of the so-called 'sequester' on March 1, which would see defence and other government spending cut immediately by US$1.2 trillion. Economists estimate this would carve 0.7% off GDP growth this year.

Sigh.

Rinse and repeat.

Here's the Washington Post:

The real impact of the sequester is becoming increasingly apparent as we approach the new March 1 deadline. Defense Secretary Leon Panetta has already ordered the Pentagon to “prepare for the worst” by taking preliminary cost-cutting measures to training, operations and weapons maintenance. And the impact of the cuts on local military bases is crystallizing as well, adding to the pushback that legislators will feel back at home if they let the sequester take effect.

And while it’s true that Congress still doesn’t have an agreement on dealing with the sequester, or anything close to it, it could also just kick the can for a few weeks until March 27, when the Continuing Resolution to fund the government expires. The sequester would then get lumped into the bigger budget debate and Republicans would have a new point of leverage that they’d be arguably more likely to use than defense cuts: a government shutdown.

4. NZ on another planet - John Key, Steven Joyce and Bill English are clinging to a belief that not intervening in our currency is something completely normal and orthodox and unremarkable. They still, on occasion, accuse the Greens and Labour of being loopy or wacko by even suggesting intervention.

Yet intervention and currency wars are all the rest of the world are doing and talking about right now.

The Bank of Japan has promised unlimited printing of money. The Bundesbank has warned of tit for tat competitive devaluations. The Bank of England is considering yet more printing and targeting nominal GDP (rather than just inflation). It is also muttering darkly about a recent rebound in the pound. The ECB is also talking out loud about the strength of the Euro.

And the conversation at Davos over the weekend was dominated by talk of competitive devaluations and currency wars.

Yet in New Zealand, the debate remains locked into a time warp from the late 1990s which says the only true and right way to run monetary policy is a single inflation target with no intervention in the currency.

Here's BusinessInsider on the debate the rest of the world is having.

5. Peak toil - The Economist writes here about the momentous development in China last year: the fall in the number of working age people.

The demographic dividend that China has enjoyed in recent decades has kept wage rates low and saving rates high. With fewer children per worker, China has enjoyed a higher income per head, a large chunk of which it has been able to save and invest. The shrinking of the working-age population will put downward pressure on the saving rate and upward pressure on wages, as coastal factories have already found. According to Mr Laurent, the number of 15- to 24-year-olds will shrink particularly quickly, dropping by 38m, or 21%, over the next ten years.

6. Europe's demographic headwind - The Economist also goes all demographic in this discussion about a similar fall in the working age population in the European Union.

This trend is one of the three great 'headwinds' to economic growth globally over the next decade or two. The other two are the long deleveraging of heavily indebted household and government sectors. The other is the structural shift over the last two decades towards a higher profit share and greater income inequality. These two are obviously linked as middle to lower income groups increased their debts over the last two decades to keep spending money they weren't earning (or at least being paid).

Here's the Economist:

This year the EU as a whole starts on a long journey—one already begun by the euro area in 2012. The EU’s working-age population (aged 20-64, as Europe’s statisticians define it) starts falling in 2013, from last year’s peak of 308.2m, and will drop over the next 50 years to 265m in 2060 (see chart). The working-age population may be shrinking but the number of older people will carry on rising. That will raise the old-age dependency ratio from 28% in 2010 to 58% in 2060. These demographic shifts, which may be tempered by people working longer, reflect an earlier transition from post-war baby boom to baby bust. They would be even bigger but for an assumed net inflow of over 1m (mostly young) migrants a year.

Europe’s ageing population will cast a pall over growth, which is driven by rising employment as well as higher labour productivity. Higher participation rates in the workforce and lower jobless rates may allow employment to grow a bit until the early 2020s; thereafter it is expected to decline. Based on what may well be an optimistic assumption about potential labour-productivity gains, the European Commission last year projected economic growth of just 1.4% a year in the EU over the next half-century.

7. China's debt triples in 5 years - Bloomberg reports here on the inevitability of some financial stress in China as its debt servicing costs surge after a tripling of debt in three years.

Again, investment-led expansion only works in the long term when the investment returns are greater than the borrowing costs. Otherwise it smells a bit like a Ponzi scheme.

Chinese companies are spending more than ever to service debt after their borrowing almost tripled over five years, prompting strategists to warn of rising default risk and a threat to economic growth.

Total short- and long-term borrowing by 3,895 publicly traded non-financial companies rose to almost $1.7 trillion in their latest filings, from $604 billion at the end of 2007, data compiled by Bloomberg show. Financing costs, including interest, on all forms of debt climbed to the highest level as a percentage of gross domestic product last year, according to Sanford C. Bernstein & Co.

Bernstein says that means less cash for investment to fuel the world’s second-largest economy, while Royal Bank of Scotland Group Plc says the threat of defaults will hold back interest- rate liberalization. The average 10-year yield for top-rated company bonds is near a 13-month high at 5.27 percent, compared with the 2.6 percent yield in a Bank of America Merrill Lynch global corporate index.

8. 'Why do we consider banks to be like holy churches?' - That's the Icelandic President saying some fascinating things at Davos. He recommends letting banks fail. Quelle Horreur.

9. Lance Armstrong sings Radiohead's 'Creep' - Well, at least he speaks the lyrics to Creep. Someone has done a lot of fancy editing. This one is especially for Karan... ;)

Creep from Matthijs_Vlot on Vimeo.

10. Totally Jon Stewart on the air quality in Beijing. He hacks a bit. !!!!

(Updated with cartoons, video)