For over 20 years, it’s either been the Prime Minister of the day or the Federal Treasurer who accepted Laurie Oakes’ kind invitation to appear on the Nine network’s Sunday program: now there’s no Sunday so Wayne Swan fronted Loz on the very underwhelming Today on Sunday yesterday to tell us that, surprise, surprise, the Global Financial Crisis (GFC) was going to wreak havoc on the Federal budget.

But Mr Swan ignored the real story. Yes, there’s going to be a “temporary budget deficit,” however the real damage to the economy isn’t going to come from the GFC, but from the amazingly rapid implosion unfolding in Asia.

Asia’s slump is now running ahead of the damage caused by the GFC to financial markets and the economies of the US and Europe. Only Germany and the US seem to be as badly hurt as the likes of Japan, Taiwan, South Korea, Hong Kong and Singapore. China has the staggers, but may pull through.

So yes, the Federal Government will be outlining a new stimulus package for the economy tomorrow a couple of hours before the Reserve Bank chops rates by at least 1%. But don’t be surprised if the cut is even greater because the news out of Asia (which are our biggest export markets) on Friday was terrible, especially from Japan and South Korea. Try up to 1.5%, according to some economists at the weekend.

They know the Asian slump is serious and is starting to whack our economy. Stimulating exports and hoping China will grow to help us avoid the crunch is a dud option.

The lesson from Japan is stark: at a time when exports are plunging, you need to stimulate domestic demand to take up the slack and help keep people employed. The only way that can be done is through Government spending. If the Federal Opposition Leader, some economists and media outlets don’t get that, then take a look at the huge export machine Japan (And South Korea) built. It’s useless now in the face of such a savage crunch in global demand.

The Japanese car industry will be lucky to operate at 50% capacity this year — that will mean a lot less Australian iron ore and coal is exported.

Last month, we told you that the media in this country (with the possible exception of the Sydney Morning Herald ), was ignoring Asia’s rapid economic slump.

Yesterday, Wayne Swan was in that club. No once did he or his inquisitor look at what is happening in Asia outside of China: Mr Swan did mention slowing China, but slumping Japan or slowing South Korea didn’t rate a mention at all:

You’ve seen a marked slowing in China, and, of course, we’ve seen the unwinding of the mining boom. In the past four or five years, that’s produced a surge of revenue to the Australian nation, and of course to our budget bottom line.

But if you look at the carnage on the stock market, what’s happened with commodity prices, generally slowing growth, what’s happening with company profitability, I think you’ll see a very big hit to our budget bottom line.

For example, I think company taxation could be down as much as $50 billion over four years as a consequence of the global recession. Of course, what that means is, because of the unwinding of China, the global recession, it will be inevitable that Australia has a temporary budget deficit.

China may not have grown much, if at all in the fourth quarter, but from what has been reported, it hasn’t slumped like Japan and South Korea. it is an oasis of growth in a sea of red ink across the most important trade region for this country.

The cover of the current Asian edition of The Economist magazine was headlined: “Asia’s Shock, Where the crisis is hitting hardest.”

It was written before new bad news on industrial production for December from Japan and South Korea, or first and third largest export destinations.

It said: “The scale and speed of that downturn is breathtaking, and broader in scope than in the financial crisis of 1997-98.”

It also pointed out that inter-Asian trade had slumped sharply with Japanese exports to China and the rest of the region off 36% in December and China’s exports also falling.

On Friday, we reported the early news that Japanese industrial production fell 9.6% in December. Later in the day, we learned that South Korea’s fell by the same figure to be down nearly 19% over the year. Japan is our biggest export market, taking around $34.8 billion in shipments in the year to June, 2008. South Korea takes around $14 billion

Macquarie Bank’s Tokyo analysts said it put Japanese output back at 1983 levels.

Here’s what The Economist has to say in the last paragraph of its leader in the current edition:

If emerging Asia needs a warning of the dangers of relying on exports, it need look no further than Japan.

Japan’s decade-long stagnation ended in 2002, thanks to a boom in exports, especially to China. Now, largely because of its failure to tackle the root causes of weak domestic demand, it is taking more of an economic hiding than any other rich country.

And it’s our single largest export market. Oh dear, that’s not the GFC any more, but a very large runaway train, made in Japan, with parts from China and Korea.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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