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avoiding recession? « Previous | |Next »
October 29, 2008

Will Australia avoid recession? It has the characteristic of a developed economy and the characteristics of a commodity economy dependent on overseas exports. In The Age Ross Gittens judges that what will happen this time is:

a recession that lasts a year or two, with the unemployment rate rising to double figures. What could produce such a result would be the severe recession in the other developed countries, combined with a "negative wealth effect" as many Australian households cut their consumer spending and increase their saving as they attempt to pay down their mortgage debt or rebuild the value of their retirement savings.

This is the scenario that the Reserve Bank, Treasury and Government will endeavour to avoid. They seem to have allowed the environmental crisis of global warming to retreat to the background of the policy agenda even though it is the more significant crisis.

MoirRuddsavour.jpg Moir

Jeff Angel's observation in the Sydney Morning Herald is that the two crises have become intertwined.

Big companies are pressing to delay action, giving them the maximum amount of time to continue business as usual - that is, to continue polluting - and they want to be paid to do it, with free permits or big cash handouts. They are using the financial crisis as another reason to delay emissions trading, or they lobby for soft targets and maximum handouts.
This is despite leaks indicating that the forthcoming Treasury modeling for carbon trading that economy-wide cost of carbon trading would be modest even though some emissions-intensive industries would be hit.

The two crises are also intertwined in that Australian industry is now maneuvering to grab most of the infrastructure fund to upgrade the ports that service the export hubs for coal in NSW and Queensland and minerals in the Pilbara in WA, rather than making Australia's economy more sustainable. The new line from the Minerals Council is that Australia desperately needs export dollars to insulate it from the impact of the global financial crisis.That kind of subsidy is the response by miners faced with falling commodity prices and shrinking Chinese demand.

| Posted by Gary Sauer-Thompson at 7:51 AM | | Comments (9)


the headline news in the mainstream press is all bad these days.

If it is economic growth that restores business confidence and generates the resources for investment, then the miners are ignoring those investments that stimulate demand in the short run and have a positive impact on productivity.

Digging coal and minerals out of the ground and shipping them to China does not drive productivity. What is more likely to drive productivity is new investment in renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where Australia has fallen behind.

Compare and contrast the headlines in the SMH and The Age. Also I would dispute that the article says it will happen, I believe it says this could happen if the worst of it is not behind us.

I agree. Gittens talks in terms of could but likely. He says that:

The financial crisis isn't over — conditions are still far from normal and could still take a turn for the worse — but, touch wood, the worst has passed.

He gives a fairly standard account of Australia's strengths, then says:
The two weak spots in this story, however, are first that our banks are heavily dependent on short-term commercial funding from the US markets, where lenders are reluctant to lend and rates have shot up, and second that many Australian households are heavily indebted, thanks mainly to their big mortgages and borrowing for investment properties.

Then he adds the paragraph that Gary quotes above, which starts:
I have a feeling that's what will happen this time: a recession that lasts a year or two, with the unemployment rate rising to double figures.

It all hinges on a hunch.

the Age says 'It's not all bad news' whereas the SMH says 'I feel a recession coming on'. Very different headlines

Australia is already going through a value correction reflected in the route of the financial markets,
As Australian property is overvalued brought on through unnecessarily inefficient labor state government land use development regulations (greedy governments and the left push are in belligerent denial), market influences are striping excess over valuation through the front and back doors! for example the ASX and the Australian dollar etc.

Gittens may say possibly but investment bank JP Morgan yesterday became the first major forecaster to say the economy will contract in this quarter and the next —a recession.JP Morgan Australia chief economist Stephen Walters told The Age he did not expect the fiscal stimulus package to have much impact.

The way consumers are feeling right now, with recession levels of confidence, with equity markets having fallen 40%, with funds frozen all over the country … with consumers now worried about their job prospects, why would you rush out and spend $1000 that the Government sends out in a nice little cheque to you?

I'd use it to pay off debt.

Lotto sales are down but instant scratch ticket sales are up. Thats an interesting little guide to how people are thinking.
The $1000 will get spent on Xmas presents.

there is a broader picture to your value correction story.The fall in the price of commodities means that resource producing nations like Australia face of future of declining standards of living. There are no international agencies (eg., the IMF) who have the job to insulate commodity-driven economies from falling prices. And if the government pursues inflationary policies and continues to run a giant deficit to counteract the declining standards of living, then capital will certainly flee.

The IMF's job is to prevent the resulting catastrophic financial collapse----I'm not suggesting that will happen. Australia is not Iceland or Pakistan. What Australia hopes for is strong Chinese growth, increasing demand for its resources and rising commodity prices.