tip off

We’re not out of the woods … yet

The economic debate is swinging and leaving politicians behind — on both sides, but primarily the coalition.

The euphoria that Australia has avoided a recession is now giving way to the realisation that as the Government’s stimulus withdraws, there are real questions about just how strong the private-sector growth needed to replace it is.

And the threat from overseas, and particularly the impact of sovereign debt and sluggish economic growth on financial and currency markets, has placed a big question mark over external demand.

The domestic economy first.  NAB’s business survey for January yesterday showed a deterioration in business conditions, sufficient that NAB’s Alan Oster confessed to be worried about it.  “The more we looked at it the more we sort of came to the view that this looks like an unexpected slowdown and businesses sort of haven’t caught up with it,” he told the ABC yesterday.

This complements last week’s ABS employment data for January, which, while surprising on the upside in terms of job growth, also showed a sizeable fall in seasonally adjusted hours worked, back to mid-2009 levels.  The fall was particularly severe among women.  This in turn backs up recent evidence that retail trade is softening.

Gary Morgan’s most recent unemployment and underemployment data, which uses face-to-face surveys and a simpler definition of unemployment than the ABS, shows underemployment still high and unemployment back up to levels of early 2009.

There’s a good long piece by Laura Tingle today (please don’t ask me for a link — go complain to Fairfax) discussing the dilemma presented to the Government by soft and revised GDP figures.  This reflected the RBA’s own rather blunt comment in the minutes from the February 2 meeting: “The GDP data for the September quarter were difficult to read, and had indeed been reissued to correct some errors.”

In short, we’re in transition from stimulus-supported growth to private-supported growth and it’s not at all clear that it’s going to be a smooth ride.  That’s one of the key reasons why the RBA didn’t push the button on a rate rise again this month.

Financial markets had generally consolidated over the previous two months, with the sources of tension shifting from banking systems to sovereign risk,” the RBA noted in its minutes.  The impact of Greece and other dud governments on the Euro and on financial markets may yet have negative implications for Australia, particularly if it translates into a significant rise in the Australian dollar, which has already knocked a healthy slice off the balance sheets of the big miners in the second half of last year.

Europe,” NAB commented this morning, “is still very disappointing and sovereign risk is real — with significant negative potential.”

Our political debate has yet to adjust.  The coalition, backed by an increasingly extreme right-wing media, is still pushing the line that the recovery is well under way and the only risk is of overheating and crowding out from the Government’s failure to immediately withdraw all remaining elements of its stimulus package — although press them on details, and suddenly it gets all a lot harder.

In a way it’s comforting that the coalition so very obviously isn’t serious about its fiscal rhetoric.  Given the opportunity to explain just how the coalition would cut the deficit and curb spending back to below 25% of GDP — a 2009 target that he recommitted to yesterday — Joe Hockey could only offer assurances of rectitude and a commitment the sale of Medibank Private.  Hockey has been privatising stuff since he left uni and should know by now that the point of selling stuff isn’t to reduce debt — you’re only trading away future dividends anyway — but to improve efficiency, and that goal is usually cruelled by Governments trying to maximise sale prices.

The Government has also become tangled up in this rhetoric, increasingly emphasising the path back to surplus in response to the debt’n’deficits hysteria whipped up by the coalition and its innumerate Finance spokesman.  But the Government also has to frame the Budget on the basis that the transition to private demand-led growth could go pear shaped.  Despite the need for demonstrated fiscal discipline, another round of cuts such as the relatively tepid efforts seen in the Government’s first two Budgets might, eventually, come to be seen as having undermined demand and employment if another shock hits financial markets and the external demand collapses.

For once, the Government can’t be accused of reacting too late.  As a Labor MP told me, there’s a reason why Kevin Rudd endlessly reiterated “we’re not out of the woods yet”.  It’s because the Government actually believed it, and conditions are now suggesting it was right to.  Like the RBA, the Government has major decisions to make about the level of stimulus it keeps providing.  And the data on which it has to make those decisions isn’t at all clear yet.

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  • 1
    David Sanderson
    Posted Wednesday, 17 February 2010 at 2:07 pm | Permalink

    And good luck trying to claim that the stimulus was never needed and should be entirely withdrawn now.

    Are you feeling lucky Tony? Huh, punk?

  • 2
    Pete from Sydney
    Posted Wednesday, 17 February 2010 at 2:11 pm | Permalink

    There’s a good long piece by Laura Tingle today (please don’t ask me for a link — go complain to Fairfax)”…..or you could pay for it…like we’re paying to read you right Guy?

  • 3
    David Sanderson
    Posted Wednesday, 17 February 2010 at 2:28 pm | Permalink

    Who guy? Guy who?

  • 4
    Most Peculiar Mama
    Posted Wednesday, 17 February 2010 at 2:40 pm | Permalink

    Why is Gail Kelly so convinced we are?

    And Greece’s economic meltdown has nothing to do with the GFC and everything to do with having to still pay the bills 14 YEARS after its engorged Limpic sportsfest in 1996 left it broke.

    George Papandreou should send One Anchovy Sandwich the bill.

    Didn’t Montreal teach the world anything?

  • 5
    David Sanderson
    Posted Wednesday, 17 February 2010 at 3:13 pm | Permalink

    Greece’s problems are caused by chronic misgovernment by both the conservatives and the socialists, both of which are dynastic parties. The Olympics are only a small part of that overall failure.However, that chronic failure was brought to a head by the GFC.

    It takes a peculiar kind of idiocy to deny the significance of the GFC. Some on the conservative side have no end of that kind of idiocy.

  • 6
    Most Peculiar Mama
    Posted Wednesday, 17 February 2010 at 4:20 pm | Permalink

    …It takes a peculiar kind of idiocy to deny the significance of the GFC. Some on the conservative side have no end of that kind of idiocy…”

    Thank God you’re not an economist.

  • 7
    Poseidon Burke
    Posted Wednesday, 17 February 2010 at 4:26 pm | Permalink

    So the rush to debt financed stimulus spending without cost benefit consideration proves to be both unsustainable (unless we want more debt) and probably ineffective for avoding recession in the medium term? Sounds like a dumb idea got dumber. How about spending money to achieve substantial structural gains to national productivity?

    In response to David Sanderson (2:07) I say the stimulus as deployed was ill advised it was only at best a short term fix and it didnt deliver us sustainable advantages. A strategic resposne would have been to say the GFC presents an opportunity to furthe reform the Australian economy. Instead we have cash handouts and deadly insulation .

  • 8
    John Bennetts
    Posted Wednesday, 17 February 2010 at 4:27 pm | Permalink

    MPM: And are you implying that you are an economist? Or, perhaps, a God? Please try harder to add value to the threads which you infect.

  • 9
    John Bennetts
    Posted Wednesday, 17 February 2010 at 4:28 pm | Permalink

    Infect?? try “infest”.
    jb

  • 10
    Peter Fuller
    Posted Wednesday, 17 February 2010 at 8:48 pm | Permalink

    While it’s questionable if MPM is an economist s/he doesn’t have much of a grip on Olympic history. Athens was 2004, Atlanta 1996.

  • 11
    Ben Aveling
    Posted Wednesday, 17 February 2010 at 9:43 pm | Permalink

    Greece’s economic meltdown has nothing to do with the GFC and everything to do with having to still pay the bills 14 YEARS after its engorged Limpic sportsfest in 1996 left it broke.

    The Olympics probably didn’t help, but Greece has been fudging the figures for a while. It was always going to end in tears sooner or later. That said, the GFC made it sooner than it might otherwise been, and probably made it worse. Certainly it makes it harder for the rest of the EU to bail Greece out.

    @John B.

    Infect is probably the right word. Most of the comments here are about MPM.

  • 12
    napoleon dynamite
    Posted Monday, 22 February 2010 at 8:35 am | Permalink

    The problem is that global banks are still very short on liquidity, albeit it is improving, and still only lending to the very best credits. It is hard to grow when the capital isn’t there.

    The mezzanine debt market is still basically non existant which is a good barometer for confidence. The only impact Greece will have on the economy is confidence, nothing else. Germany and France is mainland Europe, not Greece.

    Also, talk to any small business operator out there, they are finding it very difficult to obtain credit with most of their finance coming from their own resources i.e re-mortgaging their houses, overdrafts, cash etc. SME’s have always been the life blood of our economy and they are still a long way off from levels enjoyed pre-GFC.

    Things could be worse. We could have Gordon Brown and the UK Labour Party as our Government!

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