If you are an investor and you have not contemplated an economic slump in Australia during the next few years then in my view, you might be in for a nasty surprise. Yes the Australian economy did hold up well during the worst of global financial crisis, but the crisis isn’t over yet and it still has some sting left in it’s tail. (just ask the people of Greece!)
So what exactly do I have in mind? Well please allow me to present a fictional scenario on this blog and as you read it, just ask yourself how confident are you that what I am outlining could not happen.
Would you be surprised if anything I mention below happens? Or perhaps there are some issues raised below that we are simply sweeping under the carpet at the moment and if so, isn’t that just a little reckless?
An Economic Slump in Australia in 2011 – A fictional (?) scenario
Dateline: Mid 2011
Today the Australian Treasurer announced that the plan to bring the budget back into surplus will be pushed back by 4 years as the economic slowdown in China starts to impact the Australian economy.
Analysts say that now that unemployment has crept above 6.5% the Government will have little choice but to look at measures to try and boost the economy again, even though this will mean having to borrow further in order to do so
The situation has been made worse by the Reserve Bank’s efforts to reign in inflation which resulted in interest rates peaking late last year, and these raises are one of the factors behind the current falls seen in home prices nationwide.
“The surge upwards in commodities prices is over” said one mining analyst based in Singapore. “The rules of supply and demand are kicking-in now and as China scales back it’s stimulus spending, many large mining companies are having to scale back output especially as prices fall.”
Indeed many people appeared not to have noticed the enormous amount of money used over the last decade to start new iron ore and coal mining projects. Some of these projects have resulted in extra supply capacity coming online just as demand is softening thus hitting prices for coal and iron ore hard.
To make matters worse the opposite has been happening in the oil sector where many project were shelved as a result the global financial crisis in 2008/2009. As the global economy continues to recover, oil demand is increasing but the underinvestment in new projects over the last few years means that supply is struggling to meet demand.
Oil prices are now near $100 USD a barrel and analysts expect them to reach $120 by the end of the year. Higher oil prices have been a major factor in pushing up prices for a whole range of goods and services from airfares to the cost of bananas at the supermarket.
Another major challenge for policy makers in Australia is that gap between imports and exports still remains wide. The years of current account surpluses have not arrived and this is likely to put pressure on all levels of government to increase taxes in order to make up for the lower than expected income from mining royalties and corporate taxes.
“It’s a catch-22 situation that the Government, RBA and Treasury never thought was possible” commented an economist, “as unemployment rises immigration levels will need to be adjusted downwards, but as this happens this will adversely impact the growth of the domestic economy”
He went on to add: “sadly too much time and effort was put into working out how to spend the proceeds of a decades long economic boom and very little towards working out how to deal with anything else. Australia not only counted it’s chickens before they hatched, they also started counting the eggs before they were even laid”.
Australian GDP is expected to contract by 0.8% in the 3rd quarter but most economists fear the 4th quarter will be even worse and are tipping a contraction of 1.3% as the pullback in house prices has more of an impact.
I know many people will read what I have written above and consider it highly unlikely that any of what I outlined will occur in the next few years. But then again, is it really likely that none of the developments contained in the above scenario will turn out to be true?
Is the Australian economy really going to enjoy a magical era where:
- House prices keep rising.
- Incomes keep rising.
- Inflation remains under control.
- Iron ore and coal prices continue to rise.
- The population continues to grow at records levels but the economy is able to keep creating jobs in order to keep unemployment low.
- Taxes are not raised.
- Government spending is kept in check.
- The Chinese economy continues to grow strongly.
Imagine what would happen if one of the above does not turn out to be true? How would for example, high inflation affect the economy? Would the RBA be forced to raise interest rates higher than the historical average to try and keep inflation under control and if so, what would happen to house prices?
If house prices began to fall isn’t that likely to have some knock-on impact on another area of the economy? What would happen if something else does not fall into place according to Ken Henry’s rosy vision of the future? How truly robust is the Australian economy?
I accept I might be a little too pessimistic. But isn’t it also possible that many economists, analysts, politicians and bureaucrats are naively too optimistic? Isn’t there a real danger were at witnessing economic “Groupthink” in action? Where are the voices of caution or dissent?
I am happy as always to have my logic questioned and I also encourage readers to post their scenarios or thoughts regarding how the Australian economy will be tracking next year and beyond.
The mainstream media may not be raising concerns about the economy in the years ahead, but at least we can consider that possibility here on this blog!