As each week passes the moans of struggling businesses grow louder and finally it appears that the Reserve Bank of Australia (RBA) board members have woken up to the fact that the economy has been sliding backwards since late 2010. Once again the RBA had made a tactical blunder and raised rates too high just as they did as the global financial crisis was unfolding back in late 2007.
However the chances of Glenn Stevens admitting the RBA has made an error are about the same as Ken Henry admitting it’s a bit suspect that he left his role in Treasury and then took up a highly paid role as Gillard’s economic advisor.
It’s pretty clear that the RBA is now worried about the state of the Australian economy and hopefully they are now on recession-watch as I have been since last year.
As I have stated annoyingly many times the Chinese economy will eventually slow (and is slowing now) and will experience a recession at some point just as all major economies do. When that happens the chances are that the Australian economy will be hit hard and our policy makers have done nothing to mitigate the damage this will cause. In fact over the last few years I would suggest that they have made the economy more susceptible to a slowdown in China.
Back in January 2010 I wrote:
“…in my mind it is only a matter of time before China swings from “miracle growth” to a period where their economy slows down. The best the Chinese authorities can do is to try and manage the slowdown so that when arrives it isn’t severe, but one is coming that is for sure.
Many will scoff at what I am saying and roll out all sorts of impressive figures to support the consensus view that the Chinese economy is heading onwards and upwards for at least the next 10 years. But we have heard all this before back in the 1990?s when the “Tiger Economies” were all the rage.”
Fast forward to today and articles warning about an slowdown in China appear almost daily.
But it’s not just the Chinese economy that is showing signs of slowing and on in the Wall Street Journal recently Martin Vaughan wrote:
“…fast growth has stoked price pressures and inflation has been the key worry for central banks throughout Asia during the past year. Central banks across the region have been tightening policy with Taiwan the latest to do so with a rate increase Thursday”
Source: Economies Send Slowdown Signals, WSJ (Asia), 4th July 2011.
In addition, Purchasing Manufacturing Indexes (PMI’s) in China, India and South Korea are currently trending downwards – this may be just a short term development but it’s hard to see what would reverse this trend at the moment.
Extra demand from the U.S or Europe seems unlikely and demand from Japan is also likely to be subdued for quite some time. Perhaps consumers in these nations will suddenly go on a spending spree but I would put that in the unlikely category at this stage.
All this will (and already has) put downwards pressure on commodities prices and the Baltic Dry Index (BDI) is currently still below 1500. Some wise folks reckon it’s no use watching the BDI any more, but if you have been reading my articles you would know I have mentioned that the BDI’s weakness has been sending us a warning signal for quite some time.
At this point in time the Government, Treasury and RBA can effectively either stick their heads in the sand and pretend that Australia has a “wonder” economy or they can wake up.
The chances of Julia Gillard and Wayne Swan waking up to the economic reality the nation faces is pretty slim, but at least now the RBA seems to be stirring from it’s slumber. As for the Treasury, I hope they are now warning the Government about what will happen if the economies across Asia continue to slow and are working on a Plan B. (i.e. something different from all is well, China will save us)
But the RBA and Glenn Stevens continue to worry me especially when he makes statements like this:
“A key question is whether this more moderate pace of growth will continue. Commodity prices have generally softened of late, though they remain at very high levels. Despite the challenging international environment, the central scenario for the world economy envisaged by most forecasters remains one of growth at, or above, average over the next couple of years. A number of countries have tightened monetary policy but, overall, global financial conditions remain accommodative and underlying rates of inflation have tended to move higher.”
Source: Statement by Glenn Stevens, Governor: Monetary Policy Decision – 5th July 2011
Has Glenn looked at the PMI data from China, India or South Korea recently? Which major economies does he expect to drive global growth? Has someone spiked the water cooler at the RBA HQ with magic mushroom juice?
However it’s easy to snipe from the sidelines so you may be wondering what would I do if I had a magic wand and could make a few changes.
Firstly I would not be talking up interest rates and would have my finger on the rate cut button – ready to push it in a couple of months if we see further signs that the Chinese economy is slowing.
Secondly I would drop the carbon tax and mining tax. I would also ease up on government spending and try focus on taxes cuts for businesses. We especially need to help the small business sector.
Lastly we need focus on clearing the infrastructure bottlenecks we already have and improve our rail, road and public transport links rather than funding ventures like the National Broadband Network (NBN). You don’t help an economy be more competitive and productive by creating government owned monopolies!
By the way I am currently in the U.K. and the daily business news is not particularly cheerful. Maybe there are some major economies out there that are on the rise, but they seem harder to find as each week passes.
Greg Atkinson is the editor of Shareswatch Australia, the Managing Director of Ohori Capital and a Director of Eco Marine Power. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp