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different moods « Previous | |Next »
November 4, 2008

Melbourne Cup day. Lots of gambling and partying and excess. House prices continue their quarterly fall in Sydney, Perth, Hobart, Canberra and Brisbane, retail sales continue to contract, whilst newspaper job ads have slumped. Help is on the way as the Reserve Bank announces further reductions in interest rates. The political rhetoric is now about sheltering households from the global economic storm and preventing a recession.

Moirunemployment.jpg Moir

In contrast to the spectacle of the Melbourne Cup the new public mood is one of belt tightening given the looming job market recession.Continual drops in the value of our property is a signal to hoard, not spend. And the commodity boom has just ended in the sunbelt.

I cannot see how reducing the interest rates by 0.75%, which is a form of mortgage relief, is going to counter the decline in house prices, restore manufacturing output, prevent unemployment and restore state government revenues. Even when monetary policy is working in tandem with fiscal policy --- the Rudd Government's $10.4 billion stimulus package. Maybe the economic mandarins are relying on resilience and entrepreneurial flair to counter the economic downturn and keep economic growth going.

The economic mandarins have been slow on the appreciating the significance of the economic downturn, as they had pinned their hopes on the China effect to insulate Australia from the effects of a recession in the US and the global economic downturn on the Australian economy. Maybe they were too busy listening to the spin from the miners (eg., Rio Tinto + BHP) about the resource boom lasting for ever, with global demand for iron ore increasing forever?

The core problem is that the Australian housing boom has seen the household total debt double relative to their disposable income from 80% to almost 160%. Excessive household borrowing makes us vulnerable. to the global recession.The Reserve Bank is optimistic, as it reckons that household finances are in good shape in terms of income, whilst household assets are higher than liabilities. What if the value of the assets (shares and investment properties) continues to fall?

| Posted by Gary Sauer-Thompson at 5:59 AM | | Comments (1)


Treasury’s Mid-Year Economic Forecasts were released this morning.
Treasury forecasts real GDP growth to be 2% this year (down from 2.75% in May) and 2.25% 2009-10. Unemployment will rise to 5% (up from 4.75% in May) and go up further in 2009-10 to 5.75%. The CPI will rise further than forecast in May, to 3.5% this year, falling back to the top of the Reserve Bank’s target, 3%, in 2009-10.

As a consequence of the looming slowdown and the economic stimulus package last month, the budget forecast has been slashed to $5.4b this year and $3.6b in 2009-10.

The financial crisis, according to Swan, had blown a $40b hole in government revenue across the four years of Forward Estimates. The biggest casualties of the slowdown in government revenue will be company tax and capital gains tax receipts.

What does that mean for the grand infrastructure projects given that $40b is the core of the Government’s long-term infrastructure investment and only $26b has been currently set aside from previous budgets for investment.

Will it means slashes to health and education?