Some time ago I wrote that we would better served by having a Hobbit look after the Australian economy than the RBA, Treasury & Government and recent events have made this idea look particularly attractive. For at present we have the RBA raising rates, the Government spending and the Treasury appears to be unsure what is happening.
Frankly it looks to me like the Australian economy is adrift with nobody able to articulate what the Government is trying to do except spend. However trying to spend until the economy is out of trouble is not exactly the most imaginative economic policy decision and back in June this year I outlined my concern that Rudd’s spending frenzy was not going to keep the Australian economy ticking over nicely for very long.
On the 22nd June for example I wrote:
“…what will happen if Rudd’s billions fail to make up for the lost income from mining exports for example? Could the Australian economy slide backwards once the initial boost from the economic stimulus measures wear off? Yes it could, and at this stage this is what I expect to happen.”
At the time few people writing about the Australian economy would have agreed with me, but now it is quite clear from Australia’s widening trade deficit that I was correct. Not only have coal and iron ore exports fallen (again as I predicted months ago against the prevailing wisdom) but exports are now actually a drag on GDP, not a boost.
Quite simply the economy is drifting backwards.
I have lost count of how many times I have rambled on about the danger presented to the economy by counting on commodities resources to pull the nation through every economic crisis. Make no mistake about it, if commodities prices continue to remain under pressure and demand eases then the Australian economy will head into a recession. In fact I would even suggest the economy has been in or on the brink of a recession for some quarters.
I know the “official” data says the economy is supposedly doing well but the stock market, unemployment numbers and trade data suggests otherwise. Next I expect to see house prices soften, consumer confidence take a hit and business investment slump.
But Glenn Stevens apparently believes all is well. According to an article in the Sydney Morning Herald today he is quoted as saying: ”At the beginning of the year I would not have expected the economy to be looking as good as it does”.
Okay, so let me get this right. Rudd & Co. have splashed out $40 billion or so and the Glenn is surprised this has helped the economy? I am not sure if I should be scared or send him a note reminding him that we as a nation have borrowed most of that 40 billion.
So perhaps you think I am out of touch? Maybe, but it seems some people over at the Treasury aren’t quite as happy with Australia’s economic situation as the RBA.
Kim Christian for example in another article from the Sydney Morning Herald (December 8, 2009) reported that:
The Australian economy will remain sluggish for at least the next 18 months despite forecasts of above trend growth, a senior Treasury bureaucrat says.
Treasury director of the Domestic Macroeconomic Group Dr David Gruen says the fewer number of hours being worked by Australians could be masking a higher unemployment rate after employers cut hours rather than jobs during the financial crisis.
Dr Gruen said even if the economy experienced above trend growth next year, it would take time to bridge the gap between GDP growth and trend growth of three per cent.
“The unemployment signal is underestimating the amount of slack in the economy, simply because employers have been able to cut hours rather than jobs,” he said after delivering a speech to the Australian Business Economists (ABE) conference in Sydney.
“So, it seems to me, even with these optimistic forecasts of aggregate growth, we’re still looking at some amount of slack in the economy for 18 months or so.”
It looks to me as if the RBA and Treasury are not singing from the same hymn sheet as they say. The RBA appears to be patting itself on the back for raising rates because they say the economy is rebounding strongly whereas the Treasury appears to be taking a much more cautious few.
The fact that our export earnings are falling but we are importing more is not a good sign. In my blog GDP growth does not equal a quality Australian economy I stressed how dangerous it is for the nation to focus on GDP growth alone and Australia now finds itself in a situation where I would suggest that our GDP do not reflect (or convey) the unhealthy state of our economy.
We as a nation, have artificially propped up the economy by borrowing and spending while at the same time we are earning less. This is the same as a person ramping up spending on their credit card despite the fact they are earning less. It sounds a little risky doesn’t it?
What the Government is relying on is that the global economy will recover, our mining (and farming exports) will ramp up and we will be able to pay down our debt without too much trouble. Well that is the theory anyway.
As we have seen recently from the “Dubai shock”, seemingly unstoppable economic miracles can come unstuck. A national economy can only be pushed along for so long by building things even if they are artificial islands shaped like countries. Eventually the good times slow down and suddenly the world’s most lavish hotel or tallest building don’t look like such great ideas any more.
If you think the fallout from Dubai has been a little unnerving then just think what will happen if we get news about the Chinese economy slowing. I am not sure of course when that will happen, but it will one day, unless you believe that China is somehow different to every other “economic miracle” we have seen over the last 50 years.
When I was back in Australia recently I was surprised and even shocked how unaware most people were about the state of the global economy. It seems that many people equate China with the world, and are blissfully ignorant that the global economy has simply recovered from a massive slump and is not in the process of surging back to the heady days of 2007/2008.
The worst of the global financial crisis for many G20 nations appears to be over, but they are still far from being healthy economies. The danger for Australia is the worst is yet to come. So before popping the champagne corks I would wait about 6 months, as we just might find the nation’s economic optimism is about to have a reality check.