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November 8, 2008
If the financial and banking crisis train has left the station, then so has the global recession train, and it looks as if we are in for a long and severe and protracted two year global recession. Already the economic crisis is beginning to play havoc on state government budgets. NSW is now usually mentioned as on the way to becoming a basket.
The impact is also significant in South Australia, which is facing a $400 million budget blackhole that is expected to wipe out projected surpluses for some years into the future. Public sector job losses, spending cuts and deferment or cancellation of major capital works are now on the table, since SA has accepted that its cherished AAA credit rating will be under threat if it does not defer spending on capital works.
Kevin Foley, the Treasurer, has quarantined from the chopping block plans for a series of superschools, the $1.7billion new central hospital and $1.4 billion desalination plant. However, the Rann Government is hoping that the Rudd Government will rescue the centrepiece of the last state budget -- a $2 billion electrification of Adelaide's rail network and extension of its tram lines.
It is a similar story in other states. All are hoping that the Rudd Government will finance their infrastructure projects, since it is the federal Government wants to fast-track new infrastructure projects to pump-prime the slowing economy.The global financial crisis had reduced federal budget surpluses by $60billion over the next four years continued to cause deep concern in state governments, which had been expecting big contributions from the commonwealth for infrastructure and new COAG funding deals on health and education.
The International Monetary Fund was expecting the global downturn would be "deeper and more prolonged" than previously anticipated. It projected that the developed world as a whole will move into recession in 2009. Rebuilding balance sheets and allowing house prices to fall back to sustainable levels will make for a grim time. Unemployment will rise. The IMF argued that politicians across the world should take measures to get people spending again.
Nouriel Roubini says:
For the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort spending more than its income and running large current account deficits while China (and other emerging market economies) has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.....For the last few months the first engine of global growth has effectively shut down ....More worrisome there are now increasing signs that the other main engine of the global economy – China - is also stalling.
He adds that with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters.
That prognosis applies equally to Australia.
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Gary,
Is that why our dollar is falling? Because our economy is seen to be closely tied to China's?