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recession anyone? « Previous | |Next »
November 27, 2007

Booms become busts. How long will the boom continue? Or will inflation, arising from infrastructure constraints, work force shortages, tax cuts and high debt, ensure that the Reserve Bank squeezes the economy with ever higher interest rates. How long before that kind of squeeze makes it hard to breathe? An interest rate increase is still likely in the new year, no matter which Government is in power.

In Poisoned chalice for 'economic neophytes' Ross Gittins gives a warming about Australia's economic future. He says that Rudd:

...inherits an economy that, to every outward sign, is in good shape but, after a record expansion phase of more than 16 years, is overdue for a cyclical correction.So the chances of a recession occurring sometime during his reign are high — almost guaranteed. Worse, the chances of a recession in the next three years are high.Do you see what that would mean? Mr Howard and his treasurer would go down in the electorate's mind as the exemplary economic managers they always assured us they were. But Labor's reputation as bad economic managers would be burnt into the brains of a generation. Let the Laborites near an economy and the first thing they do is stuff it up.

Gittens says that though federal governments invariably get a second term as a matter of course should the recession occur during Mr Rudd's first term, it's easy to see him being dispatched at the first opportunity.That would be through no fault of his own. He would simply be a victim of the vagaries of the business cycle.

Gittens is not predicting that a recession is imminent, just that, by the law of averages, the next one can't be too far away. He is arguing that the ALP has taken charge at a point where most of the nice aspects of the boom have passed and we're on to the nasty bit. The danger is that the mishandling of booms has often precipitated a recession. caused by the Reserve overdoing the rate rises that stop the economy rather than just slowing it.

Does that mean the ALP's economic conservatism should involve making deeper cuts in spending than it foreshadowed in the campaign, and possibly delaying the fulfillment of some of its electoral promises to ensure a strong and prosperous economy? How does the ALP juggle equity and efficiency in toughened times? What room do they have to use the economic strength to restoring and increasing the fair go so that Australia has a competitive economy and a good society?


| Posted by Gary Sauer-Thompson at 6:52 AM | | Comments (7)
Comments

Comments

Gary,
Maybe. The Reserve has been patting itself on the back of late for good economic management. And yet the signs looks as if the squeeze has not been early enough or hard enough.

What does the AFR say about this? From memory they wanted the Coalition to win and are quite critical of Rudd ALP because it is anti-business. Do they point the finger at the RBA?

Peter,
the AFR are hostile to a Rudd ALP because of their all-advised promise to roll back workplace reform. Under an editorial entitled Labor must now deliver they say:

If Treasury advises that this will fuel inflation it should be reconsidered. Mr Rudd has no mandate to blow the lid off the economy. And it is one thing to rabbitt on about housing affordability and petrol and grocery prices in opposition, as Mr Rudd and his shadow ministers have doine, but quite another to take effective action in office without making problems worse by subidising them or wrapping them in red tape. These populist policies sit uncomfortably with Mr Rudd's claim to be an "economic conservative"; so to do his plans to use taxpayers money to build a national broadband network and cancelling the sale of Medibank Private.

The RBA is not mentioned. The ALP is the big problem. Free-market policies the solution.

That should give you the neo-liberal flavour--a good bit of slash and burrn is the good economic medicine. Labor must stand strong against the pressures of populism and deliver good economic management as advised by the AFR.

so equity and the fair go for battles and working families is equated with populism by the AFR?

So we need a stronger emphasis on the economy not society; on efficiency not equity; and on private self interest and not the public good.

Is that what the AFR is saying?

yes it is reasonable to assume that there will be some sort bust. I am not sure if we could call it a recession coming from this point. If it does go that way before 2010 (I think we agreed in an earlier post that that was likely regardless of the Government) the absence of water will play a big part in it.

Les,
Peter Martin in the Canberra Times makes the following call:

The bank's new forecasts show inflation climbing beyond the top of its target band to 3.25per cent and staying there for at least a year.Even by the end of the year after that, more than half-way through the new government's term, the bank says it can't be sure inflation will be back within its comfort zone.

The forecasts suggest that inflation could spiral out of control.Even with things as they are, it is heading up and will require at least one more rise in rates to bring down.
Add in tens of billions of dollars in tax cuts and associated promises, and still more rate hikes look certain.

Whether a recession happens depends on the extent of the rate rises.

A lot is made of the resources boom and the consequences of it stopping or slowing.
More important to Australia is the Logistics boom that is going on now. When you have a situation like we have had in the last few years where there is a general well being in business. People are buying, consuming and needing more and more. Everything needs to be moved around dispatched, forklifted and stored. Looking in the Saturday job ads you can see the Employment Co's with ads saying 25 forklift drivers, 30 truck drivers needed and so on.
The amount of people employed in this area is a big factor in the low jobless figures as it scoops up and employs those people that are on the line or just above the line of unemployable.
When the interest rates start going up you will see these job ads starting to disappear and that will be the point where it starts to go bad.

How does Bush mange to get his Reserve Bank to push rates down?

Very contradictory messages coming from them lately.

These WWW sites are worth a read on demand and supply side economics. It seems if you believe in one "your are a little Liberal" or another you are a "little conservative " as the G&S song goes.

So much for the "science" of economics that rules our lives.
http://www.commondreams.org/views06/0514-20.htm

http://www.forbes.com/finance/2007/08/17/energy-congress-legislation-pf-guru-in_mm_0817energy_inl.html

MA