It wasn’t that long ago when ex-Treasury Head Ken Henry talked about the Australian economy being in a ‘Golden Age’. I guess when you can retire on a lucrative public service pension and then parachute into a highly paid job as an advisor to the Prime Minister the future does probably seem bright. But now in early 2012 as unemployment appears set to rise and the economy is showing signs of weakness, Ken Henry’s ‘Golden Age’ comment might end up in the same category as Tim Flannery’s ‘Dams will no longer fill’ prediction.
My long held view that the Australian economy is unbalanced and primed for a recession has been set out on this site numerous times so today I am going to also focus on what some in the mainstream media are saying about the Australian economy and then outline briefly my outlook for 2012.
Firstly let’s look at trade and according to an article in Bloomberg yesterday things look pretty good on that front for Australia. The article states that:
“Australia’s trade surplus soared to a record in 2011 on coal and iron ore shipments, sending the local currency to a five-month high.
Exports outpaced imports by A$19.3 billion ($20.7 billion) in the 12 months through Dec. 31, a Bureau of Statistics report showed in Sydney today. The December surplus unexpectedly widened to A$1.71 billion from a revised A$1.34 billion in November, compared with the median estimate of a A$1.2 billion surplus in a Bloomberg News survey of 21 economists.
The data underscore the Reserve Bank of Australia’s expectation that Chinese demand for the nation’s commodities will help propel the domestic economy even as a global expansion slows.”
That news about exports does sound good but there are a few things that need to be said about the passage above. Firstly, energy exports are to Japan are up since most of its nuclear reactors are not in use pending stress tests after the Fukushima nuclear power plant incident. This would have given the export numbers a boost upwards.
Secondly the slow down in the Chinese construction sector, which is happening, will take time to affect iron ore & copper shipments but I will go out on a limb and say this slowdown will hit the numbers in the first half of 2012.
Lastly it worries me that the Reserve Bank of Australia (and in fact the Government as well) has no plan to deal with a major downturn in Australia because they believe that demand from China for our commodities will save the day. Interest rates are still too high!
The Baltic Dry Index (BDI) has fallen off a cliff since December 2011 and is back at a level where it was during the darkest days of the global financial crisis. This suggests to me that global trade levels are on the way down and this will impact the demand for commodities like iron ore, copper and coking coal.
A less optimistic view regarding the Australian economy was set out recently by Philip Bowring in the Wall Street Journal. In his article Australia’s Economic Luck May Not Last he writes:
“The producers’ assumption is that additional demand from China will continue to keep prices buoyant. But China’s growth is slowing and anyway will move gradually from materials-intensive infrastructure to consumption and services. India and other developing countries should see steady growth, but that will probably no more than offset stagnation in developed-world demand for materials.
All this should be worrying for Australia, where the consensus believes that any softening in mineral prices will be offset by increases in Australian supply. But commodity prices always move much more violently than changes in demand. How would Australia’s trade look if gold were back at $800, coal and iron ore at $60? The gain that Australia has enjoyed in its terms of trade, which has underwritten so much else, would quickly vanish.”
Those two articles sum up the two main views regarding the Australian economy. The first one is that the Chinese economy will basically continue to drag the Australian economy along for the ride upwards whereas the second view is that the commodities boom will come to an end, and that the impact of this on the Australian economy will be severe.
Back in April 2010 I wrote the following:
“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”.
Around the time I wrote the above paragraph the G-20 crowd were patting themselves on the back for saving the global economy. Their cunning plan had been to borrow a heap of money and spend their way out of trouble and the few people (like me) who thought this was quite a stupid plan were in the minority who were simply ignorant of the magical properties of Keynesian Economics.
In Australia rather than trying to strengthen sectors outside of mining our government’s ‘brilliant’ plan involved such measures as handing out cash so people could by cheap imported goods, the construction of school halls and the infamous home insulation program. This spend-a-thon quickly wasted the billions saved by the previous government and now Australia, in the midst of a mining boom, is in debt.
So where is the Australian economy heading in my view? My answer remains the same as it did in 2010…for a fall. However unlike 2010 many of the mainstream media business and finance commentators also appear to share this view now and even the Gillard Government seems aware that it needs to do something.
Too bad Gillard spent a fortune on her education revolution over the last few years which basically achieved nothing. The money would have been better spent on a manufacturing revolution.
The reality is now that it’s probably too late to do much to protect the Australian economy from a slowdown in China unless that slowdown isn’t for another 5 years. If the prices for commodities continues to fall this year then a recession in Australia is almost a certainty.
It is true that events in Europe haven’t helped, but all booms come to an end and the failure of policy makers to plan for this is a national disgrace.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp