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Why the economic gloom? « Previous | |Next »
September 9, 2008

Michael Stutchbury, Economics editor of The Australian, asks some good questions about the state of the economy:

If the Australian economy is still basically healthy, why has economic confidence slumped so sharply compared with other countries? If we've got the cushion of the China boom, why has our stock market fallen further than other rich countries, including even the US where the whole credit crunch began? If the economy is being propped up by an investment boom, why is business so pessimistic? If Australia is so well placed, why is our currency being marked down?

He turns to the appearance by Glenn Stevens, the Governor of the Reserve Bank, before a federal parliamentary backbench committee yesterday Stevens said that the high export prices of iron ore , coal and other minerals will fall by 5 per cent during the next year. He acknowledged that China is slowing down.

As the credit crunch had hammered the US and Europe, exports from China clearly have suffered. The rest of the world is marking down the value of Australian assets on the back of the China slowdown.

The scenario is one of slow economic growth in Australia and rising unemployment.

| Posted by Gary Sauer-Thompson at 8:11 AM | | Comments (3)


Cheer up everyone. We'll all still be here if economic *growth* is slow! We might even laugh once in a while.

It is interesting to see that the Reserve Bank is no long saying no worries because China's boom will keep the good times rolling along. Their tune is starting to change about the effects of the downturn in the global economy.

If you ignore all the crapola currently being emitted by politicians, bankers and economists and focus on what the large global institutional investors are doing you'll conclude the worst for the global economy.

During the past 6 weeks the Australian dollar has dropped like a stone against the US dollar - 20% decline. Speculative capital has been exiting Australian markets. I think this is due to dollar carry trades unwinding and has affected other markets, not just Australia. In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. Recently there's been huge demand for US dollars; it's up against all other currencies and also precious metals. A lot of these investors are highly leveraged, so if they sense lower or negative growth, they'll rush for the exit. With the Australian dollar tanking and investors unwinding, I don't see much scope for the Reserve bank lowering interest rates a significant amount.

Quoting an article I read the other day,
"Capital continually scans the world in search of return and yield. When that capital starts returning home, that's a signal that institutional investors believe the global economy is slowing".