One of the tasks of any end-of-year piece is to try to find some underlying theme to events across the year, to explain them as part of some grander story that suggests stuff doesn’t just randomly happen, but happens for a reason, good, bad or indifferent. As humans, we like to think there’s some pattern or order to larger events, and even when there’s not we’ll shoehorn them into whatever theory suits, however implausible.
That methodological note out of the way, however, one of the intriguing recurring issues across not merely the beleaguered European and US economies but here as well this year is the abandonment of fiscal stimulus in favour of monetary policy.
Only in Europe is this on the basis that countries simply lack the fiscal capacity to stimulate their comatose economies and indeed believe it necessary to reduce, in some cases dramatically, their spending. By way of stimulus, the European Central Bank has reversed its nonsensical interest rate increase of earlier this year. In the UK, in the grip of the Cameron government’s austerity drive, the Bank of England has resorted to rounds of quantitative easing. The United States is supposed to be in fiscal crisis, but its bond yields are now at record lows (2.925% overnight for 30-year bonds). With the US economy only showing fitful signs of life amid high unemployment and a depressed housing market, as in Europe the political focus is on expenditure reduction. The Federal Reserve is left to should the burden of stimulus via quantitative easing.
Here the story is altogether different. With a strong economy and low unemployment, there’s no current need for any stimulus. But regardless, the government has brought forward considerable spending into this financial year as part of its plan to ensure it meets its goal of a small surplus in 2012-13.
That’s the point at which we’re more likely to be feeling the effects on the oncoming European depression via reduced Chinese and global demand and, possibly, a credit market freeze.
The government and commentators — regardless of whether they approve of the government’s race back to surplus or not — seem to be of the view that, should stimulus become necessary as the effects from a European collapse significantly reduce world growth, monetary policy can be relied on to keep us going.
It’s almost as if the successful stimulus measures in response to the GFC, here and overseas, have been forgotten. More recent things have been forgotten, too.
Those confidently anticipating that lower interest rates will do the trick if stimulus becomes necessary — and who will presumably criticise the government if it changes tack and opts for fiscal stimulus — seem to forget that monetary policy is fine for slowing the economy, but less effective for stimulating it when so many Australian mortgage holders simply keep their repayment levels the same regardless of what happens to interest rates. Interest cuts never deliver those much-hyped multi-thousand dollar savings into the pockets on consumers, because few consumers bother to cut back on repayments.
That problem is now exacerbated by Australians’ newly discovered thrift. After decades of being harangued by politicians, economists and business that we don’t save enough, we’re now saving so much business is jacking up about it. That further reduces the likelihood an interest rate cut will translate into additional demand.
Regardless, everyone’s now a born-again advocate of monetary policy as the preferred tool if Europe goes from merely catastrophic to Europocalypse.
Consumer recalcitrance was another theme of 2011 here. Our sudden turn to thrift, and our enthusiasm for hunting down bargains online, has infuriated traditional retailers, who have spent decades raking in profits based on huge mark-ups. Now Australian consumers have discovered just how much they’re being gouged and are routeing around the big retailers via the internet. Department stores, bookshops (now virtually extinct) and audio-visual content, clothing and footwear retailers are the hardest hit. While those sectors are not — despite what a lot of journalists might think — the whole retail sector, it’s sending a shock through the supply chain and cost bases of retail, a competitive jolt the sector has never had before in its history because it has traditionally relied on being able to exploit a captive consumer market.
Nonetheless, it complements the mining boom perfectly. It would have been impossible to have had the two traditional drivers of the Australian economy of the past decade, housing construction and retail, continuing at the same levels as they were prior to 2008 while the resources sector continues its massive expansion, not without strong inflation pressures and an ensuing response from the RBA. Inflation instead is back within the RBA’s target range despite the big pick-up in growth from the disaster-induced slowdown early in the year.
Despite the economy’s strong performance, critics of the government continue to insist something disastrously wrong with our industrial relations system (praised by Fitch’s, oddly enough), that the government is guilty of “waste and mismanagement” and is failing to do anything about the “productivity crisis”, by which is usually meant a return to WorkChoices, despite the disastrous impact that had on labour productivity.
Some in the opposition even continue to complain about debt levels. But Australian bond yields, too, are now at record lows, and Australia now has a AAA rating from all three major ratings agencies. Whatever Wayne Swan’s faults as a communicator, his economic record is stacking up as a truly impressive one.