Saturday, July 3, 2010
JUST months after the world entered a recovery, some analysts are worrying that we might be about to exit it.
As we open a new financial year that we expected to bed down the recovery, nervous investors are now speculating that the world will sink back into a double-dip recession.
That's not unusual. Keep this firmly in mind: nervous investors tend to see a lot of recessions coming that never arrive. The consensus view, here and overseas, is that this is another of those times.
But the consensus too can be wrong. And if the mood and data grow darker, it will hurt the Gillard government in its bid for re-election as the government that kept Australia out of the global financial crisis.
In 2008, Kevin Rudd had the money to spend his way out of trouble. Julia Gillard doesn't have that option.
Yesterday the sharemarket sank for the seventh day in a row, in the wake of Wall Street falling to its lowest point for eight months. The benchmark S&P/ASX200 Index, which topped 5000 in mid-April, ended the financial year at 4301.5, falling almost 15 per cent in the past 11 weeks.
For those who prefer pessimism, there are clouds almost everywhere: some of Europe's governments have borrowed more than they can readily repay; the potential for China to be blown off course as its real estate bubble bursts; the data showing very weak growth in Europe and unsteady growth in the US.
In Australia, the data is mixed, with growing signs that the Reserve Bank might have moved too fast in raising interest rates.
Yesterday the Bureau of Statistics reported that job vacancies shrank 3 per cent in the past three months, even in seasonally adjusted terms. New home sales tumbled in May, while building approvals are doing zigzags rather than rising as predicted. Business and consumer confidence have plummeted since March. And the trend of retail sales has been virtually flat so far in 2010.
And yet there has been no letup in the pace of jobs growth, which is still charging along. Business investment plans as of April/May were still strong, especially among mining companies. China has kept growing at breakneck pace, pushing demand and prices for our minerals to records.
Our fortunes depend more on China, Japan, India and Korea than on Europe and the US. Some analysts warn that China's local governments are so heavily in debt that even Beijing will not be able to bail them out without serious damage.
In those idyllic times two months ago, when the market downturn was just beginning, the Reserve forecast growth of 3.5 per cent over the new financial year, and Treasury forecast 3.25 per cent. The way things look now, they might be too optimistic, but probably not by much.