Eight days of hardship on the local sharemarket, two major international banks taking billion dollar losses, Centro getting wobblier by the day, a plunge in local consumer confidence — is Australia still looking strong enough to withstand an economic slowdown in the US? ANZ Chief Economist Saul Eslake answers Crikey’s questions.

Crikey: With more bad news from the US this week, in particular the Merrill Lynch write down and the Citigroup losses, has Australia’s ability to ride out a slowdown changed in any way?

Saul Eslake: There are channels through which a downturn in the US can impact Australia, but at this stage I don’t think they constitute a significant threat to the Australian outlook. Among other things, the direct export link is pretty small. I think less than 8% of Australia’s exports go directly to the US. There is an indirect back-channel effect via the impact of a weaker US economy on Asian countries’ exports to the US, which results from the volume of the prices they pay for stuff they buy from us. But remember, most of the growth in countries like China is actually driven by domestic spending, not by exports to the US. So it’s reasonable to think that there will be some indirect effect on Australia through commodity prices and volume of commodity exports to Asia. We’re not completely insulated from that, but it should be fairly small.

Crikey: Are there any other channels though which Australia might be affected?

Eslake: The other channel, which we’ve seen highlighted this week, is the flow through into effects on wealth and confidence, which may not be particularly logical but is real nonetheless. Obviously people have been reading on the front page of the newspapers or hear on the news, for the eight days now, that the stockmarket has gone down, that the valuation of their superannuation savings has been directly affected. They will also hear more talk about a US recession, and those kind of things can adversely affect consumer sentiment. If it is sustained, it may have a dampening impact in household spending here. That’s an indirect channel through which adverse development in the US can have an impact on Australia. Again, whether those things are enough to take a material amount of momentum out of growth and spending remains to be seen.

Crikey: Given that Australian companies like RAMS and Centro have suffered as a result of the US subprime crisis, is it reasonable to suggest that other Australian companies may yet be adversely affected?

Eslake: You can never rule that out, but it’s not obvious why there should be a problem. RAMS was vulnerable to international developments because of its funding model. There may be more like that, although I’m not aware of any. I can’t make any comment on Centro because they are an ANZ customer, but it looks like they are an isolated case. There might be others out there, but who knows? If you recall HIH, the biggest financial collapse in Australia, that was neither a harbinger of more collapses like it, nor did it have a material negative impact on the Australian economy. These things can happen. They’re obviously nasty for anyone who’s directly exposed to them, but they don’t necessarily mean that there is a whole chain of them waiting to be disclosed. Provided that’s the case, those examples do not spell the end of the economic cycle. But if the economic cycle is drawing to an end, there will be more of those, chiefly the businesses that are highly geared are particularly vulnerable to a downturn in the economic environment. That’s one of the things that happens in major downturns.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey