According to many reports in the media Australia has escaped a technical recession and the nations future is so bright that we will all have to wear shades. But despite the somewhat upbeat business and financial news of late the reality is that the next few years are going to be very challenging for Australian companies.
Although I tend to be a bit of an optimist even I have been taken aback by some of the recent comments by normally sane commentators such as Michael Pascoe that basically suggest the worst is over for the Australian economy. How anyone can say that at this stage is beyond me, and illustrates once again how many journalists or financial commentators with few business skills often misread what is happening.
Australia has so far escaped the technical definition of a recession by not having two consecutive quarters where the economy has contracted, but we are still in recession territory. Company profits are down, unemployment is creeping up (albeit slowly) and the main driver behind the domestic economy is the Federal Government. This is hardly a situation where you could say it was business as usual.
In addition there are some economic facts that are often missed by people rushing to be the first to call “all clear”. Firstly the unemployment rate in Australia does not give us a clear indication of the jobs taken out of the economy because the figures do not include all the temporary visa holders who have lost their jobs. I am not sure of the exact number involved but it would be in the tens of thousands. Not only have these people lost their jobs but many have left the country taking their dollars with them.
Secondly our export earnings are declining and we have not seen the full impact of the decline in contracted commodities prices filter though yet. As anyone in business will tell you it is very hard (if not impossible) to raise prices when demand is weak, so it will be a while before companies like BHP and RIO can significantly raise prices again. In the meantime they are still looking at cost cutting and further job reductions in Australia are a possibility.
Thirdly one of our major exports areas, education, has be given a major blow with the number of students coming to Australia from China and India set to decline. Some of this decline has to do with the bad press Australian received over the bashing of some Indian students, but probably more damaging has been the revelations that many overseas students have be often ripped off and our soured relations with China.
In addition the whole student visa system has been open to exploitation with many foreign students coming to Australia simply as a means to study just about anything and then quality for a longer term visa. Quite rightly the Rudd Government is making changes in this area but these actions will probably further reduce the number of overseas students coming to Australia to study.
So to get a true picture of where the Australian economy is now we need to take into account falling export earnings, fewer workers and the not insignificant impact of fewer foreign students coming to Australia. (many Australian universities are already starting to panic about this)
As a result non-government induced domestic demand is unlikely to recover anywhere near the levels seen during 2007-2008 for some years even without taking into account the further challenges Australian companies will face over the next few years.
The big unknown on the horizon of course is the Emissions Trading Scheme (ETS) which is simply a tax. Call it a carbon tax, call it a global warming tax or whatever you like but is simply a punitive tax and the Government will be the big winner.
The ETS will mean that many companies will have to somehow pass higher costs onto consumers and other companies, so this will then suck money out of the domestic economy. If you have to pay more for energy for example then you are going to have less to spend at Harvey Norman, so quite simply an ETS is not a plus for most Australian businesses.
What is more worrying though is that there will be countries that will be able to escape tough CO2 reduction targets and other nations that will simply be “creative” with the way they manage/report their CO2 emissions. Therefore Australian companies will often be at a disadvantage when competing overseas and may need to move some operations offshore to help get costs under control. This is hardly likely to help create jobs in Australia.
At present nobody in the G20 is talking in detail about how they will exit from their economic stimulus programmes because the truth is they are unsure how to do this and not send their economies backwards again. Somehow they need to not only stop spending so much, but then look at paying down debt and at present are simply hoping that the global economy will recover and save the day.
In Australia the Rudd Government will eventually have to end it’s spending festival (I hope) and this will take money out the domestic economy. Apparently this will not be a problem according the Government, Treasury and RBA because exports will save our bacon and all will be well. Maybe so, if they have got the timing right.
But few things work out as we plan and so Australia would indeed be blessed if economic events played out quite like the RBA & Treasury think they will. Remember these are the same people who missed seeing the chaos that was about to hit the global economy in 2008 so I am not sure why people believe they are right this time around.
Isn’t it more likely that Australian companies will face over the next few years sluggish (at best) growth in domestic demand, higher costs and higher interest rates?
If so, then the business environment in Australia will remain challenging for the next few years and it is probably too early to say we have dodged a bullet just yet. I suspect there might be people scrambling to revise down some forecasts and a lot more sombre looking faces at press conferences before we get through this little downturn.
As the old saying goes; “it ain’t over till the fat lady sings” and I am not hearing any singing at the moment. Perhaps I need my ears checked and if so I will be pleasantly surprised, but for now I will not be joining the “we escaped a recession” party.