The recession, economic stimulus and the stock market.
March 15th, 2009 · Greg Atkinson · 53 Comments
Often economists, journalists and politicians use so much jargon when talking about the current economic situation that is is hard to follow what they are actually trying to say. Economists for example cannot seem to agree on anything except that they are legends in their own minds, journalists try and fumble through economic discussions and politicians simply try and convince us they know what they are talking about. The simple fact is much of the time all three groups talk utter rubbish.
Let’s start off with a classic term that is used a lot these days “negative growth”, which makes as much sense as a term a colleague of mine once used – “not unimpossible”. What economists are trying to say is the economy is in decline or that there is a “contraction” in terms of national gross domestic product (GDP). Everybody tends to get nervous about a contraction in the economy because it simply means things are going backwards; jobs are being lost, businesses are seeing sales decline, exports are down and for the government income from taxes is falling but welfare payments are up.
In economics if there are at least two quarters of GDP contraction then an economy is said to be in a recession, although a recession can be any period of reduced economic activity. Economists and politicians like to play around with the term recession and thus we end up hearing variations such as technical recessions, mild recessions, severe recessions, deep recessions, shallow recessions and even depression like recessions.
Often how a recession is described has little to do with hard data and more to do with such factors as; how much attention a journalist is seeking for his/her article (scary headlines in recessions work well), what side of politics a person is on and maximising media focus. Economists making dire economic predictions tend to get more airtime during recessions for example.
If you want to scare the pants off people then you can use the phrase “a long, deep, severe, painful and depression like recession” whereas if a government if trying to convey to the people that it is effectively dealing with a recession it might use the term “mild recession” or they may even pretend that a recession does not exists and simply define it as a “recession like” downturn. Catchy terms are also very much in demand and the clowns at the IMF (International Monetary Fund) have dubbed the current economic mess “The Great Recession”.
Also prepare yourself for comments from the government like, “the recession would have been worse if we had not acted” or “it would have been worse if we did nothing” which is the same as boasting you wore a seat belt after you smashed into the rear of the car in front of you. The point is it would have been better if you did not crash in the first place and similarly, it is best to avoid recessions rather than have the government praise themselves over how well they are managing one.
The fact is that nobody actually knows what sort of recession the economy will have until it is all over. For months people argue about if there will be a recession or not, they then move in a phase of talking about how severe it will be and for how long it will last and then finally, they will start to talk about a recovery and how bad the recession was.
At present Australia is in the twilight zone where the Government appears unwilling to utter the word recession but many economists are openly talking about it. Mind you many of these economists are the same “experts” who in 2008 said Australian would avoid a recession. Enough said.
Now recessions are generally not good for governments. Business and consumer confidence plunges, unemployment rises and people start to look towards governments for solutions, and if a government has no response then they will see their chances of re-election dwindle.
Now I must stress at this point that a government seeks to find responses when faced by a recession but these are not always solutions. Rudd’s pre-Christmas cash handout for example was never going to prevent a recession, but it was a response and a popular one at that.
In other words the cash handout itself was not a solution in terms that it really solved any problems, but it did give the government some breathing space. As I mentioned in another blog this was a colossal waste of $10.4 billion dollars and just remember, that most of us will end up paying that money back sometime in the future.
So what can a government do when a recession is on the horizon? Well for one thing it is not wise to talk down the economy and raise interest rates but that is what Rudd, Swan and the RBA did last year. (see “The Reserve Bank, rates cuts and a possible nasty turn“)
The wise course of action for any government is to try and maintain growth and make it easier for companies to keep on staff. Lower interest rates, corporate tax breaks and even some well directed government spending can all help to support a nation’s domestic economy. This leads us then onto the subject of economic stimulus packages.
An economic stimulus package is where the government simply tries to spend itself out of trouble using our money or by borrowing money that we will have to pay back later. I have no problem with government’s trying to spend a little extra during a recession to help the economy as long as it is well planned, well directed and will deliver long term benefits to the nation.
In December last year in Actions to stimulate the economy in 2009 and beyond I mentioned some areas where the government could outlay funds during this recession that would benefit all Australian’s in many years to come , but sadly it seems most of Rudd’s $42 billion economic stimulus package is going elsewhere.
As a result we, the taxpayers, will end up bearing the burden of a massive re-election spending programme that will not make Australia any more competitive in the future. Yes the extra money for hospitals is good, but this is simply a way to fund Rudd election promise to improve the hospital system and ultimately it will fail anyway.
As for government cash handouts, they are simply a waste of money and at best give us our own money back or quite often give our money to someone else. Much of the money given out via cash is banked or used to pay off personal debt which is quite a good thing for people to do, but it is a lousy way to stimulate the economy. Also people are not inclined to spend if you tell them they are in the middle of a national economic crisis so I question the logic of scaring people one day and then telling them to go out and shop the next.
A better use of the money for example would have been to increase pensions for seniors and care givers resident in Australia i.e. people who actually need the money even when the nation is not in recession. Also how about helping self funded retirees who have been hit hard by the stock market slump and/or have money locked up in managed property funds etc? I would suggest that if you follow where the government handouts are going you will see it was more related to electoral strategy than any well thought out economic planning.
So there is a lot happening with the Australian economy at the moment, exports are dropping, domestic demand is weakening, jobs are being lost and we have the government splashing around money in order to maintain economic growth (and get re-elected). All this action is reflected in the movements of the stock market and as we all know the movement has been generally downwards since the highs way back in late 2007.
In good times the stock market trends upwards but when a nation’s economy faces tough times, the market adjusts downwards. At the moment the Australian stock market is essentially trending sideways and this suggests investors are not sure if the worst of the economic crisis is finally being worked out of the global financial system, or if we are about to see the global economy lurch further downwards.
It is important for investors to remember that the stock market generally moves down before the impact of a recession spills into the real economy (i.e. before people start losing their jobs and sales decline etc.) and we saw this in action last year, when the ASX All Ordinaries/ASX 200 were both in bear market territory well before most experts in Australian were talking about recession.
Conversely the stock market should start to recover when the bad news stops, and this is likely to happen well before jobs are created and economic growth returns. (see also: What we need for a sustained stock market rally)
We do not know when the stock market will start the next long term trend upwards nor do we know when this global economic crisis will start to subside, all investors can do is look for signs of a recovery and hope to ride the next bull market upwards to at least cover the losses sustained during this current bear market.Search terms: info sbm net sa loc:AU