This morning’s sharemarket fall gave Wayne Swan’s remarks on AM this morning a decidedly Pollyanna feel. The Treasurer was spruiking the good and ignoring or avoiding the bad, such as the weak Chinese and European manufacturing data, the poor jobs US jobs report for May (and the sharp cut in the already weak number of new jobs for April), poor data from India, Brazil and, of course, the struggle by Spain to find a way to bailout its banks without being forced to ask for a bailout for the country as a whole.

Commentators and economists have been calling it a “Wall of Worry”. Whatever you term it, the global outlook is worsening by the week (there are new Chinese economic figures out later this week that will raise fresh concerns about the economy on which Australia’s current strength is based).

We have our own series of economic data this week: the ANZ jobs data showed a second monthly fall, down 2.4% in May after a 0.8% fall in April (when the bank was forced to re-examine the early month strength in job ads because of dodgy data). The ANZ is looking for a 5000 fall in jobs in May and the unemployment rate rising back to 5.1% — still very solid from the surprise 4.9% rate in April.

Today’s ABS business indicators for the March quarter showed a rise in inventories, a fall in company profits and a rise in wages and salaries. But the detail revealed a sharp fall in mining company profits (down 13%, seasonally adjusted) but higher sales and inventories. There were moderate to weak levels of sales, stocks and wages and salaries growth in other sectors in the domestic economy.

Manufacturing was also weak: a 9.8% fall in gross profits, but salaries rose by a small amount, sales were marginally higher (seasonally adjusted) and there was a small build up in stocks. And retailing saw 3.3% rise in gross profits in the March quarter (seasonally adjusted) and a 0.5% rise in sales and a rise in salaries, so it wasn’t the black hole that the first quarter figures seemed to suggest, more badly wounded.

Meanwhile, overseas departures and arrivals showed a reasonable outcome for April: arrivals were up 5.6% on a year ago, departures were up 5.7% on the same time (both seasonally adjusted). The arrivals have held up despite the dollar being over $US1 for much of the past year.

On Wednesday we’ll get March quarter GDP data and it will be solid (especially compared with Europe). The private investment, strong construction work, retail sales and business inventories will add to growth, and net exports will detract, so a reasonable quarterly rate of between 0.5% and 0.8% is suggested. But that will be historical and based on a much rosier international climate. When viewed against the pace of the slide in the economies of Europe, the worsening plight of Spain, the approaching Greek election in 13 days time, the sharp slowdown emerging in China and the gradual loss of momentum in the US economy, it will start to look very remote.

Swan has pointed to our strength (rightly claiming the current high level of interest rates is an asset because it reflects a solidly performing economy), especially the huge resources investment boom. But you wonder if it wouldn’t be in the government’s own interests to note that the outlook has weakened in the past month or so and that Europe, China and the US aren’t as strong as (or in Europe’s case even weaker than) they were in the first quarter? We keep seeing this in bond yields: Australian bond yields followed US and German and UK yields down to historic lows this morning: 2.72% for the 10-year bond and 1.92% for the three-year bond.

Treasury Secretary Martin Parkinson has shown far more gumption in addressing the worsening economic climate in his appearance at Senate estimates last week than his minister did on AM this morning. As an economist, Parkinson is sanguine about a continuation of the budget deficit if there is a downturn in revenue and export income (as there will be) in coming months. But both sides of politics are fixated on the budget outcome as though it was an economic good in its own right, rather than a tool for achieving quality economic management.

The RBA is tipped to cut rates by either 0.25% or 0.50% tomorrow. This will be a proactive cut because of Europe (just as the cuts last November and December were), rather than one driven by the banks’ recalcitrance, as last month’s 0.50% cut was. Will it have any impact on consumer confidence? Confidence has fallen since the rate cuts of late last year and share prices and house prices have slid, most likely driven by the moans and groans from bank economists such as Westpac’s Bill Evans, from the heads of a long list of leading companies (Wesfarmers’ Richard Goyder, the CEOs of Myer and David Jones) and those economic experts in the mining industry, such as Nev Power of Fortescue or Jac Nasser at BHP Billiton.

As a result, Australians are saving heavily at the moment, paying down household debt and stashing cash away for a rainy day they think might come. Coupled with changes in the way we’re consuming, further interest rate cuts might not — despite the current political fashion of asserting that monetary policy can do the “heavy lifting of economic stimulus” — be overly effective in helping sectors like retail. That sector, along with manufacturing, is more likely to be helped by the lower dollar, although compared to currencies like Brazil’s the dollar has held its value quite well.

Instead of endlessly repeating the line about the “patchwork economy” Swan and the government should be clearer to voters. The more they refuse to admit the gloomier outlook and the rising potential to damage the budget, the more furtive the eventual recognition of the changed circumstances will look. The Australian economy will continue to do well and demonstrate the government’s sound economic management, but it’s not immune to the Wall of Worry.

Peter Fray

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