Shareswatch Australia

Australian stock market investing, ASX charts, analysis & market forecasts.

Shareswatch Australia header image 2


The Catch-22 recession: send in the clowns!

June 4th, 2009 · Greg Atkinson · 11 Comments

Well Australia has avoided a “technical recession” for now so I guess this means that if you have lost your job or your business is struggling then technically you are actually doing fine. But if we are not in a recession, why are company profits taking a beating, unemployment rising and the stock market still so low?

The answer is that of course we are in a recession and most people can feel it, but as I outlined back in March we would end up in a pointless debate about what sort of recession we are having (see: The recession, economic stimulus and the stock market) and that is what is happening now.

In economics it is generally accepted that when an economy experiences at least two quarters of GDP contraction then it is in a recession. But like so many things in economics this makes little sense, just like the almost blind faith in economic models.

For example if you had one quarter where the economy contracted 5% and then the next month it grew by 0.1% then technically the economy is not in recession, but of the course in reality the economy would be struggling. Perhaps the economic model used by Treasury may indicate Australia is not technically in a recession, but that just highlights again the limitations of their models.

The situation at the moment is the Australian economy went backwards 0.6% in Q4 last year and has grown (according to the number crunchers) by 0.4% in the first quarter of this year. If we engage our brains and ignore the desk bound boffins, then common sense tells us the economy is struggling and according to the data over the last six months it has indeed slipped backwards.

Of course the latest economic data is good news, but we should not start thinking the good times are back. We should just accept the latest economic data for what it is, a very mixed bag that indicates that overall the economy is not doing well. Mining exports might have pushed the economy into the black in Q1, but in Q2 the lower prices for coal and iron ore (and a stronger $AUD) are going to hurt.

I would hope that anyone capable of rational thinking would appreciate that the only reason we are not deep in recession is because of the demand for our exports and not because of the way the Government has managed the economy. This would be true no matter who was in power now, but the real test for the Australian economy is how it will finish 2009.

So here we are in the recession twilight zone. Both sides of politics will massage the data to suit their arguments, various economists will give their opinions on what the numbers mean and an array of other assorted clowns will enter the fray. Of course as I mentioned in my post in March we will not know what sort of recession the nation has suffered until it is all over, end of story.

Although Australia is benefiting from strong exports we still import more than we earn from these exports, therefore we are still sending money overseas to pay for the way we live. Of course as long as we can service this debt then in theory all should be fine, but we may see a generation of Australian’s that are in debt in some form for most of their lives.

On top of this we also need to remember the $300 billion or so of Government debt that is building up, so as a nation we are counting on both soft and hard commodities keeping us in the lifestyle we have grown accustomed to. Thus as a nation we are assuming that in the future we can pay off this debt but we have not actually considered in detail how this will be done.

We are in a Catch-22 recession. On one hand we will have people telling us that we are not in a recession because we have had growth in the last quarter, but we also know that company profits are down, unemployment is rising and business investment is falling.

The government will look smug and say their economic stimulus measures are working, but they will not cut back on future spending because they will say the economy may slide back into recession if they do this.

And how do we know were in a recession? Well you have to be objective and look at the underlying data such as imports falling 7.7% this does not suggest growth. But if we think we are in a recession and some data suggests this is so we sill may not be, technically speaking.

The catch is if we are in an economic downturn then the Government will keep spending, but if the economy is growing then there is no need to spend billions of dollars on questionable projects and the Government should scale back it’s economic stimulus measures. But if these projects were now to be cut this may actually result in the economy slipping into recession later.

What is the solution? Well it is basically too late now for the Government to change direction, they have committed themselves to spending big and that is what will happen. Throwing large sums of money at any problem often results in some short term benefits but I doubt we will get much value for money from the way taxpayers money is being tossed around at the moment.

If the Government had simply scrapped the Emissions Trading Scheme and provided incentives for companies to cut CO2 emissions we could have met our international obligations (as silly as they are), protected jobs and supported the economy through the recession without going into a massive amount of debt.

But we are where we are, and with any luck the rest of 2009 will not be brutal. Hopefully by the time the Australian economy looks like it might be in serious trouble global demand will pick up and save the day….for a while anyway.

But I hope at some point as a nation we realise how we have failed to broaden our economy, because it might serve us well now to be Asia’s mine and farm but in the next few decades we might find ourselves in serious trouble if we remain that way.


11 responses so far ↓

  • 1 Senator13 // Jun 6, 2009 at 9:12 pm

    Holding a press conference for avoiding a “technical recession”… What next? I think we have only seen the tip of the ice burg – there is paying back all that debt still to come. Wonder if they will be holding press conferences when the cash splash party mentality has warn off and we are left with the hangover?

  • 2 Greg Atkinson // Jun 7, 2009 at 9:48 am

    The question is how will the Q2 GDP numbers look? We are yet to feel the full impact from falling commodities prices and a slump in demand. Perhaps the Government should not be boasting about saving the economy just yet? Perhaps if the RBA did not raise rates so far in the first place we would have ended up with the same result without needing to throw around billions of tax payers money via cash handouts?

    Isn’t it a bit strange that money was taken out of the economy via higher interest rates in early-mid 2008 and then to counter the slowdown the government had to pump money back into the economy? Seems to me that so far we are down billions simply because the Government and RBA messed up in 2008.

  • 3 Pete // Jun 7, 2009 at 5:04 pm

    I’m interested in the GDP figures too.

    Especially since the Gov. is constantly using it as a measuring stick when saying how much debt it will take on.

    If the measuring stick changes…the values can change dramatically.

    Eg: If our GDP went from ~1.2T to 900B, would 300B of debt still be the same proportion? Not even close. Without increasing the debt, the proportion would change from 25% to 33%. If you increase debt and lose GDP at the same time, then the change is naturally even more dramatic.

    The Gov. should definitely not be boasting about saving the economy yet. This will come back to haunt them in election time, or at the election after that. Think of the smear campaigns they could run on TV. Ouch.

  • 4 Greg Atkinson // Jun 7, 2009 at 8:50 pm

    Pete I agree with you. What is also important is the ability to pay back the debt. It is no use saying Australia has low debt compared to other G20 nations, what we should focus on is our ability to service that debt. It seems we are betting on the commodities boom coming back…but what is Plan B?

  • 5 Senator13 // Jun 7, 2009 at 9:07 pm

    The GDP figures are going to be extremely interesting.

    Great point Greg – I hate how the Government keeps running the “our debt is smaller then theirs” line. What the hell is the point of that? Our debt is MASSIVE and as Pete said, the scenario to recovery is a fairytale as it stands.

    We might be heading towards 10% unemployment, but hay, Kev says we avoided “technical recession” so everything is OK now, right?

  • 6 Greg Atkinson // Jun 9, 2009 at 10:26 am

    Senator 13 – many people seem to be swayed by the comparison of our debt to other OECD nations and the fact that our exports have held up well. Our exports have held up well because we did not take a major hit because of a collapse in manufacturing exports..why? Because manufacturing exports are not a major part of our economy. I am not sure this is something we should be happy about.

    I recall how pleased Australia was to escape the dot.com/tech bubble. Yes it was good we dodged that bullet, but it was also a reflection of the fact that we do not have a significant tech sector.

    I am pleased of course that our soft and hard commodities exports helped the economy but imagine what will happens if these are soft over a long period…how are we going to earn the money to pay down debt? Are we relying on commodities always being able to prop up the economy?

  • 7 Ned S // Jun 9, 2009 at 11:24 am

    Put that way Greg, I guess one could venture the opinion that Australia doesn’t have an especially well balanced economy. Would be interesting to see what happened if the world decided those alternative energy sources Mr Obama funded are working out nicely and hey, coal really is dirty stuff. Plus just maybe Russia got a bit more motivated regarding digging up its iron ore:

    “Russia is the fifth largest iron ore miner and accounts for about 6% of global production, though its reserves are unlimited because of the huge land mass.”

    Source: http://www.bulkmaterialsinternational.com/htm/w20080903.243705.htm

    Oz begins to sound a bit like Ireland in a potato famine. I guess the pollies might describe the result as “negative” population growth? Could help make Oz housing affordable I guess – Smile!

  • 8 Greg Atkinson // Jun 9, 2009 at 1:38 pm

    Ned I think Australia needs to remember we do not have a vice like grip on commodities. I was just reading an article a few days ago in a Japanese business paper about the strengthening ties between Japan and Russia. Seems Siberia has a lot of Uranium and the Japanese are keen to get their hands on it to fuel their nuclear power plants. Russia also has LNG and will ramp up supply to Japan and as you point out they have plenty of iron ore as well. (not to mention oil)

    So maybe China and Japan will both look towards Russia more in the years ahead? Seems logical, Russia is a lot closer than Australia.

  • 9 Pete // Jun 16, 2009 at 3:22 am

    Greg:

    Because manufacturing exports are not a major part of our economy. I am not sure this is something we should be happy about.

    I recall how pleased Australia was to escape the dot.com/tech bubble. Yes it was good we dodged that bullet, but it was also a reflection of the fact that we do not have a significant tech sector.

    So maybe China and Japan will both look towards Russia more in the years ahead? Seems logical, Russia is a lot closer than Australia.

    Ned:

    I guess one could venture the opinion that Australia doesn’t have an especially well balanced economy.

    Good points! I like your link Ned.

    I know I come across as overly pessimistic (i’m a cynic), but I really do think it is unwise for Australians to make any assumptions on a return to 2008 resources boom. There are so many things that could derail that completely.

    And whilst I don’t have anything against the sector, it is really the ‘all eggs in one basket’ approach that I am against. Our stupid Gov. and lot of Australian investors seem to have their eggs quite neatly stacked in the iron ore basket.

    As for investing, the approach I am taking is the anti-base minerals approach. See the way I figure it is if the resources boom does (miraculously?) return, then money will be forthcoming anyway. If it doesn’t, then hopefully I will do okay out of it. So it is a bit of a half-win/win strategy for quality of life (in my opinion).

    Besides, China doesn’t like us much now (surprise,surprise – screw them over enough times and they don’t like us?)

    Beijing backlash against Rio deal
    http://business.smh.com.au/business/beijing-backlash-against-rio-deal-20090611-c4xv.html

    Sometimes I think we are just a small, immature country playing silly games with the big boys. With a little bit of effort I think China could sink us into one of the nastiest recession/depressions we could ever imagine (by removing credit facilities, majorly reducing trade).

  • 10 Greg Atkinson // Jun 16, 2009 at 7:56 am

    Pete – I agree with you. Some of the comments in the media for example talk about China like they are some new country that has just appeared on the face of the earth. The Chinese have been doing business deals for centuries and have been dealing with trade issues a lot longer than the executives at BHP and RIO.

    Many years ago Australians were less arrogant but I think the commodities boom has made us feel we are more important than we actually are. We are just a nation of 20 million odd people…on a global scale that is nothing.

  • 11 Gary // Jun 25, 2009 at 8:24 pm

    Yes I think it is a bit early to get excited about the Australian economy. A stronger Oz dollar plus a fall in exports might make the next lot of GDP numbers look pretty awful.

Leave a Comment

*


 


This site is not intended to act as any form of financial or investment advice.  © 2008–2015 Shareswatch Australia — DisclaimerCutline by Chris Pearson

The information contained in this website is for general information purposes only. Whilst we endeavour to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk.