Tuesday, June 5, 2012
None of us can see through the fog ahead to know how bad it will be. But some things are clear. Each government is focused on its own political needs. No one seems to be in charge of the world economy. We have many politicians, but no statesmen. And we have no consensus on a solution that might work.
The critics were right to warn that Europe's past "solutions" were inadequate to resolve its problems. Instead, the problems have grown. Any solution to them now would be at the cost of the successful countries, and their voters feel they have no responsibility to bail out those in trouble. The path to a resolution is blocked by political deadlock.
The crisis in Europe is the one that could bring down the global economy. But growth is slowing around the world, and the common factor is a loss of confidence.
Last week's job figures confirm that the US recovery has lost its strength. China's housing market is in recession, driving down its manufacturing and steel production, which in turn is driving down prices for Australian coal and iron ore. India, swimming in debt and politically gridlocked, has seen its growth rate slump to a nine-year low.
Australia has its own problems. Each new data set confirms its growth is mostly in mining and related sectors, which are just a sixth of the economy, mostly in Queensland and Western Australia. The mainstream economy in the south-eastern states is at best growing sluggishly, at worst going backwards.
This week brings an avalanche of data, including new figures for GDP, unemployment and the current account deficit. Yesterday we learnt corporate profits have fallen 10 per cent in six months: mostly in mining, from a high level. But in the past two years, manufacturing profits slumped 34 per cent, while manufacturers' unsold stocks rose to an 11-year high. That spells job cuts ahead.
The Bureau of Statistics does not have the data to measure states' output; it just takes an informed guess once a year. But take all the data we do have, and it suggests Victoria, South Australia and Tasmania are all going backwards. Their industries have borne the pain of the higher dollar without the gain of mining investment and boom prices. And at federal level, no one cares.
Interest rates remain far too high. Even after last month's cut, rates for home buyers, small business and depositors are at 2004 levels, when the economy was in a broad-based boom, with growth of 3.75 per cent and adding 265,000 jobs. That is very different to what we are experiencing now, or what lies ahead.
The dollar remains far too high, still 35 to 40 per cent above its 20-year average from 1985 to 2005. Yet for business, the silver lining in Europe's storm clouds has been a fall in the dollar. Since February, it has slid 10 per cent against the US dollar, and 7.5 per cent against all currencies. Unless you are travelling overseas or buying imports, that is good news, because it reduces pressure on businesses that face global competition. If it is sustained, it will save jobs and incomes, and reduce the risks facing the economy.
One of the most important and vulnerable of these is home prices. Many of us might like to see home prices fall, but you would not want to see them collapse. The RP Data-Rismark index reports that the fall in home prices is accelerating at a worrying rate: down in the year to May by 8.4 per cent in Melbourne, and 5.3 per cent nationally. When house prices collapse, they take wealth and consumer confidence with them. Collapsing house prices played a key part in the intensity of the recession in the US, Spain and Ireland. It's another good reason for the Reserve Bank to cut rates today.
We don't know how serious this will become, but it is no time for political stunts. Treasury secretary Martin Parkinson was right when he said on Thursday that in a global recession, Australia has the ability to fight back with both interest rate cuts and budget measures to defend the economy. "Our fiscal position is so incredibly healthy vis-a-vis the rest of the world that we can actually provide stimulus", he said. "We could, if necessary, actually go back into deficit to support activity."
Tony Abbott endorsed this on Friday morning, then backflipped a few hours later to declare that the promise of a budget surplus should have "no ifs and buts". Is he telling us an Abbott government would rather see Australia go into recession than run a deficit? Seriously?