Monday, May 18, 2009

Australia - a quiet harbour in a global storm

I had breakfast with the Reserve Bank of Australia (RBA) last Friday. They were relatively upbeat about the prospects of the Australian economy bouncing back from what they reckoned was the ‘worst contraction in global GDP since World War 2’. But get used to relatively weak levels of growth.

What the global economy has gone through has been shocking; however our local economy doesn’t provide any measure of how tough global conditions are. Australia has been a quiet harbour in a global storm. Most of the graphs which the RBA showed looked like someone falling off a cliff. The worst of the slowdown has been in developed countries leading to sharp falls in business and consumer confidence.

Conditions seem to be gradually improving, but very much linked to huge stimulus packages being unleashed by Governments around the world. The Chinese economy has been very responsive with Chinese banks being told to lend money - businesses didn’t even have to ask, it was just dropped into their bank accounts. It will be interesting to see whether the recovery will be sustained.

For me, the key signs will be unemployment and consumer sentiment in developed countries. While Australia has been one of the least affected developed countries, my gut-feel is that it will be very tough through 2009. Lower interest rates have been cushioning us from the impact, but private sector debt levels are high and further rises in unemployment will affect consumer sentiment. It is much worse elsewhere and I don’t think we can claim a recovery until unemployment in developed economies has been stemmed, enabling a recovery in consumer sentiment.

Another key risk to the outlook for a slow, steady recovery is further financial sector issues. It seems our eastern European mates have fallen foul of the old ‘Swiss francs lending’ scenario and defaults across the region are on the rise - the bulk of the fall seems to have been carried by Swiss, Austrian and Nordic banks. We wouldn’t be surprised to see some further financial market problems before the recovery is set in train.

Global Governments have turned bankers to overcome these, by taking over crimpled financial institutions and buying bonds (by printing money) to recapitalize these. With unemployment still rising, Government’s have been writing blank cheque’s to cover future losses - incurring almost unlimited liability.

At what cost you might ask? Well taxpayers will need to pay back these loans and the cost will be future levels of growth.

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