On a daily basis, dozens of finance and business journalists try to convince the general public that they somehow have an insight into what the Australian economy is doing or how the economy will fare over the next six months or so. But the truth is, nobody has a clue what will happen for the rest of this year as we are still stuck in the Economic Twilight Zone.
Let’s start with the Australian economy, which most economists now agree is struggling outside the mining sector. I am not an economist and I’m also not a recent convert to struggling Australian economy school of thought. As regular visitors to this site will know, I have been writing about the inherent weaknesses in the Australian economy for some time and have discussed how the stock market has been telling us for more than a year, that the economy is struggling.
At the moment those weakness are starting to become apparent. The housing market is starting to lose some steam and this is adversely impacting consumer confidence. This in turn makes the business sector less confident while companies also need to deal with such things as a strong Australian dollar and a chaotic political landscape.
The current situation was summed up quite nicely I believe in a recent Commsec market bulletin in which economist Savanth Sebastian wrote:
“Aussie consumers remain super cautious. The Westpac/
Melbourne Institute index of consumer confidence hit a two-year low of 101.1, falling by 2.6 per cent in June after a 1.3 per cent fall in May. The latest fall in consumer confidence highlights the cautious attitude displayed by Aussie consumers.
Most people still harbour doubts that the global financial crisis is
truly over. Then add in the natural disasters – not just in Australia but around the globe – the tensions in the Middle East, fears about a carbon tax, and sliding equity markets and it is clear that consumer sentiment is facing a lot of headwinds. No doubt the added uncertainty about further interest rate hikes is also taking its toll on confidence.”
Earlier in the year many economy and market commentators were saying further interest rate hikes by the Reserve Bank (RBA) would be coming along “sooner rather than later” (to paraphrase Jessica Irvine from the SMH), but we are now almost half-way through the year and the RBA is sitting on their hands – which I believe by the way, is the wise thing to be doing.
In fact I would suggest that if the RBA were to raise rates during the next few months then someone better check what they are drinking at their board meetings. This is not the time to be putting further pressure on the housing sector, consumers and businesses.
It’s pretty clear now the growth of the Chinese economy is slowing, mind you it’s still zipping along at a rate that leaves most of the world in it’s wake. At the moment however, nobody seems to be worrying too much about this slowdown, although I sense the news regarding the Chinese economy is going to get worse during the remainder of 2011 and this will really spook the RBA.
My view of the Australian economy is that we are still stuck in what I called the Economic Twilight Zone in July 2009. Back then I wrote:
“The “zone” is confusing place for we cannot be sure if the economic data we see if a trend or an abnormally. The economic picture has been distorted by the interventionist actions by government around the world and nobody is quite sure what this means for the long term world economic outlook.
We are no longer in bear market territory and yet we are not really confident we are in the next bull market either. Australian economic data suggests we are not yet in a technical recession however unemployment is rising, business investment is down and government tax revenues are falling. It feels like a recession but is it? Or do we simply feel we are not in a recession when we actually are?”
Fast forward to today and it looks to me that not much has changed. The stock market has effectively gone nowhere, employment growth is stalling and you won’t see too many company CEO’s or business owners dancing on tables.
The uncomfortable truth is that we are hoping the US economy will sort itself out while keeping debt under control (yes, you can laugh now) and that China will somehow manage a command economy better than has ever been done before.
As for Europe, it seems everyone has such low expectations for most economies there (except Germany) that it’s almost forgotten except when a debt crisis comes to the fore. The days of racking up debt to keep the people happy are over.
The Australian economy for it’s part, is being dragged along for the ride and you get the sense that the Government, RBA and Treasury are hoping more than anyone else that their almost blind faith in the mining boom will pay off.
That’s because as I have said many times, there is no Plan B. It’s China or bust.
So to sum up the current economic situation in Australia and in fact globally, let me use a quote from Donald Rumsfeld, the former U.S. Secretary of Defense.
“There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.”
Or as we might say in Australia – it’s as clear as mud!