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.