Fears are growing for the health of the Australian economy after yesterday’s ANZ monthly survey of job ads showed a 9.7% fall in December and a close to 30% fall since July. Another survey released this morning confirmed the gloom — economists are forecasting massive jumps in unemployment this year as Chinese growth slows and resources boom starts to tail off. All this could spell political chaos for Kevin Rudd, who has prided itself in staying ‘ahead of the curve’ on policies to stimulate the economy. But does the government really have the levers to stave off recession? Crikey asked a group of leading economists for their views on the best way forward.
Paul Brennan – Citigroup head of economics: Unfortunately it’s going to be hard to avoid a recession regardless of what the government does because the global backdrop will continue to deteriorate. All we can do is moderate the damage before developments overseas impact on the economy here. The government has already done quite a bit pre-emptively both in terms of fiscal and monetary policy — we’ve stimulated the economy aggressively before rises in the unemployment rate. Interest rates are of course important and we think the cash rate will get to 3% by March. And certainly tax cuts would help. But the difficulty is that businesses and households want to pay down debt rather than spend. The classic stimulus measure is for the government to increase infrastructure spending, especially if there is going to be a protracted global downturn. Another measure in the short-term is public housing — despite problems negotiating funding deals with the states, this could provide a more timely boost to the economy.
Michael Knox – Chief Economist and Director of Strategy at ABN AMRO Morgans: The crucial thing to encourage is investment from small and medium-sized firms. When SMEs invest they create employment — when someone builds a new vehicle or a new truck and when someone buys a workstation they need to hire someone to operate them. One way to increase investment by SMEs is to cut interest rates aggressively and we expect the RBA to continue to do that this year. Another way to stimulate the economy is through investment allowances. At the moment the 10% investment allowance is far too small. The US already has allowances of around 50% and we need to follow suit.
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Chris Caton – Chief Economist, BT Financial: First of all interest rates are critical, although this is, of course, a matter for the Reserve Bank. There’s definitely room for a second stimulus package, especially if you go by the guideline that economic stimulus should be temporary, targeted and timely. Raising pension levels doesn’t really make sense because this would be permanent — you don’t want to do something that would threaten future flexibility. One-off payments would make more sense but if a recession is on the cards the government won’t be able to avoid it. If there were spending projects out there that could be justified, it would be a really good time to get them started, even though the effect of these might be some way off.
Josh Williamson — Senior Strategist TD Securities: If the Rudd Government is wanting to minimise or avoid a recession in 2009 it needs to undertake fiscal initiatives with an immediate impact. This could come through tax cuts, increases in the pension rate or other welfare payments or even reductions in the level of the GST — anything that can stimulate consumption and business activity. The government needs to be careful though because any excess federal government stimulus should be considered in light of the reaction from the Reserve Bank on interest rates. The other thing to consider is that a recession could be unavoidable, regardless of what the government does or doesn’t do. They may only be a position where they can minimise the damage.
Assoc. Prof. Steve Keen: I think there’s a 100% chance of not being able to stave off a recession this year. What we’re going through is the greatest deleveraging in the history of capitalism. This is worse than the Great Depression, and the scale is so great that there is nothing the government can do aside from tinker around the edges — it’s completely out of their control. The can attenuate the effects to some extent by running a deficit and guaranteeing government deposits. But really, the government isn’t really talking about a stimulus of the scale needed to drag us bank from the brink.