If there was any lingering doubt (such as in the collective heads of Malcolm Turnbull and Julie Bishop) that the global economy is heading south and dragging Australia with it, then reports and statements overnight from the US Federal Reserve, the International Monetary Fund and the International Labour Organization should put that right.
The trio of commentaries from some of the world’s major oversight and policy bodies makes it clear the global slump is not ending, despite attempts in the US sharemarket to call a bounce with the $US825 billion Obama stimulus package passing Congress.
In New Zealand this morning, the country’s Reserve Bank chopped its official cash rate by a record 1.5% to a new low of 3.5%. Our central bank meets next Tuesday and there’s some who believe it could follow with a big cut of its own to get rates to 3% or less in one go (they’re 4.25% at the moment), which is sitting above the CPI and near the bank’s own inflation measure of 4.3%.
The Fed’s statement in Washington after a two-day meeting was long, detailed, and if anything, more gloomy than the December meeting’s statement where rates were cut to 0%-0.25% and a start made on a major quantitative easing to try and restart the slumping economy.
The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly.
Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Fed went on to explain that it will try virtually anything (which, take note M Turnbull and J Bishop) to stop the slump, stabilise lending, economic activity and demand and try to get growth back on track:
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”
For those in Australia who reckon we are heading for an almighty crash, the RBA is still cutting rates (by up to 1% or perhaps 1.25% next Tuesday) and not doing what the Fed and the Banks of Japan and England will be doing in gearing up their balance sheets and buying Government bonds to boost lending.
We are a long way from that, but as the IMF pointed out, the global economy is sliding towards outright negative growth this year: the Fund puts world growth at a tiny 0.50%. That’s such a small margin that you can now say the world economy will contract for sure this year for the first time in 60 years. That’s down 1.5% on the forecast late year and comes despite the trillions of dollars already spent and or being committed in bank bailouts and stimulus packages in the US, Japan, Germany, Europe, the UK, Australia and elsewhere.
Rather than fruitless spending, imagine what the forecast would have been without it and what the IMF (And Fed) would have now been saying in their reports and commentaries.
That’s a message that the Federal Opposition, and a growing number of Republican members of the US Congress, clearly don’t understand. Like Mr Turnbull, who has been accusing the Rudd Government of over egging the situation, one senior Senate Republican even suggested things in the US weren’t as bad and creating the impression of a crisis.
The Fund said this means “monetary and fiscal policies need to become even more supportive of aggregate demand and sustain this stance over the foreseeable future, while developing strategies to ensure long-term fiscal sustainability. Moreover, international cooperation will be critical in designing and implementing these policies in order to avoid destabilising distortions.”
In other words, governments will have to lift their levels of spending in stimulus packages (in a fiscally responsible way) and take heed of what other governments are doing.
And it’s why the world economic outlook update from the IMF should be required reading for all doubters. The Fund says advanced countries like Australia will contract this year and in trying to counter that, will average budget deficits of around 7% of Gross Domestic Product.
That would mean a deficit of around $A80 billion, out of a total budget of $A300 billion and GDP of over $A1.1 trillion. But Australia’s budgetary position is much sounder that the rest of the advanced world: we started the crunch with a surplus and more growth (even though it is vanishing) and no domestic debt to speak of. So the NAB’s estimate on Tuesday of a deficit of $A40 billion or so is probably more appropriate.
The IMF raised its estimate of the potential deterioration in US-originated credit assets held by banks and others from $US1.4 trillion last October to $US2.2 trillion now; that’s a jump of more than 50%.
The IMF is now forecasting that the global recession will be much deeper and more protracted than previously envisaged.
The fund forecast that while global growth is now expected to fall to 0.5% this year, with advanced economies expected to suffer their deepest recession since World War II, the advanced economies are expected to see their economies contract by 2% — the first annual contraction in the post‑war period.
That means the economies of all our major trading partners, bar China and India, will be shrinking this year: India and China will slow, with the latter’s GDP estimated to rise 6.7%, which is just under the 6.8% growth seen in the December quarter. That was the slowest growth for the best part of a decade and down two percentage points from the update late last year.
But the really bad news for Australia is contained in the forecast for commodity prices which has powered our economy for the last five years.
That’s the bad news for Australia.
And the human cost, already evident in the surge of jobless in the US, the UK and Europe, especially in countries like Spain? The International Labour Organisation put that in perspective overnight.
The ILO said the world slump would lead to a “dramatic increase” in unemployment this year, which would certainly lead to 18 million-30 million additional unemployed and more than 50 million “if the situation continues to deteriorate”. An extra 50 million jobless would take the number unemployed to 230 million, or 7.1% of the world’s labour force.
And that’s the nub of the argument at the heart of the mulish refusal of Mr Turnbull, Ms Bishop and the rest of those who oppose Government stimulus spending here and abroad: at least 18 million extra people out of work, most not able to get jobs, homes lost, finances and families under pressure if we do something.
If nothing extra is spent, or is badly spent, or neutered by opponents so it become inefficient, then an extra 30-odd million people could lose their jobs, including quite a few in this country.
It’s a no brainer, isn’t it?