Buckle
up, Australia: recession is coming
Think
Australia is immune to global downturn, depression and despair? Remy
Davison from Monash University says we should think again.
By
Remy Davison, Monash University
29
June, 2012
Think
Australia is immune to global downturn, depression and despair? Think
again.
One
would be plundering the depths of naïveté to believe that Australia
can continue to exist in an oasis of economic tranquility, while the
global economy plunges into turmoil.
Commentators
recognise that constant conjecture about recession can become a
self-fulfilling prophecy. However, for most analysts, the objective
is to examine the economic data dispassionately and base predictions
upon a reasonable interpretation of the available evidence.
If
certain data point to a Australian recession, potentially, this in
itself raises important public policy issues:
1.
How well prepared is Canberra for a major downturn in taxation
revenues?
2.
What budgetary scenarios are being modelled by Treasury in the event
of a significant downturn in Australia’s growth?
3.
What strategies does the Commonwealth government have in place to
deal with the impact of a (worst-case scenario) “GFC II”, or a
longer-term global recession followed by a slow, weak recovery? (the
likely scenario).
4.
How does the federal government plan to deal in the longer term with
the emerging “multi-track” economy, characterised by a booming
resources sector (WA and Queensland), a white-collar recession
(scroll down to Macquarie’s
research report on
pages 3–4), a declining and hollowed-out manufacturing sector
(Victoria and South Australia), and a declining
housing market (national).
What
are the key indicators suggesting Australia is destined for
recession? Here’s the case for the prosecution.
Shares
Stock
exchanges are not only a real-time measure of market confidence, but
they also have a delayed-reaction impact upon the real economy. It’s
axiomatic that business investment, private-sector job creation and
the profitability of the retail sector, personal investment incomes
and superannuation industry dividends are ultimately determined by
the relative performance of local and global stock markets.
In
early June, $20 billion was rudely wiped off the Australian stock
market, on the back of another $35 billion lost in August 2011. The
falls continued in September-October, as the ASX200 dipped below 3900
points.
The
fall wasn’t as severe in June, but it was still coming off a 2012
high of over 4400. But it was the
deepest trough since the market collapse of August 2008 and January
2009 – the apex of the GFC.
The
market ebbed and flowed, but recovered for about 18 months from early
2010 until August 2011. Monthly market volumes were reasonably
steady, and the market did not dip below 4400 until August 2011,
losing 5.5% on August 8.
The
China Syndrome
Reality
is about to bite Beijing: China sent a fraction under 20% of its
exports to the EU and the US in 2009. So approximately 40% of all of
China’s exports went to the world’s biggest markets. And that is
mainland China alone.
Factor
in Taiwanese figures (firms like Foxconn and Hon Hai build your
iPhone and iPad in southern Chinese mainland factories, like
Huizhou), plus the entrepôt port known as Hong Kong, and the figures
rise appreciably. (However, hard statistics are difficult to come by,
given the level of intra-Chinese imports and re-exportation.)
But
in 2011, Chinese export unit shipment growth slumped
by 60% year-on-year
in the September quarter of 2011.
The
entire model of the PRC’s economic growth and development is
premised upon export-oriented industrialisation (EOI). Put simply,
this means that the economy is export-geared predominantly to produce
value-added consumer durables at low prices in sufficient volume to
be sold-on in more affluent markets.
But
when those affluent markets deflate rapidly in the wake of
unsustainable debt positions, foreign direct investment (FDI) dries
up, export orders decline significantly, and Chinese firms are
compelled to confront the international politics of surplus capacity.
Surplus
capacity is the problem that two of the most eminent political
economists, Roger Tooze and Susan Strange, analysed in
1981. This book proved to have such longevity, it was republished in
2010, as the problems it studied from the era of stagflation in the
1970s, remain pertinent, eerily, today.
Meanwhile,
China’s central bank has a currency problem. The yuan renminbi
(RMB) retains a crawling peg, meaning it tracks US dollar movements
within a certain band of adjustment. But US borrowing, particularly
since 2008, combined with a “near zero” target range in the US
Fed’s funds rate, has seen the yuan appreciate
slowly by around 7.5% (or
10%, factoring-in inflation), although the RMB remains vastly
undervalued. But every time the US Fed engages in quantitative easing
(QE), yuan appreciation costs China – a lot.
Follow
the money
The
Reserve Bank knows recession is coming. That is why the RBA has cut
official rates by 75 basis points in the last two months, in the hope
of engineering a soft landing. The legacy of Bernie Fraser’s
dithering in 1989-90, while Australia burned to the ground, lingers
long in the memory of Martin Place, the RBA’s HQ.
But
the blunt instrument of monetary policy is an insufficient and
inefficient policy tool to induce adequate demand, investment and
consumption growth in the face of tripartite pressures comprising
Chinese economic slowdown, European austerity and American deficit
reductions.
The
US Fed is reportedly considering QE3 – a third round of
quantitative easing – as a stimulus to the US economy, which
produced weak growth and jobs figures in May, after posting positive
results in the first quarter of 2012.
Over
in Washington, Obama is in a quandary. Another US stimulus could be
damaging politically in an election year, and positive economic
outcomes arising from QE may not be clearly evident by November. For
example, when George H.W. Bush went to the polls in November 1992,
the recessed US economy was already recovering, but the results were
not manifest, and Bush lost. Badly.
Economic
forces beyond our control
What
does all of this mean for Australia? The fact is that Australia’s
economic fate will not be decided in Canberra; it will be determined
in Washington, Beijing and Berlin. The future of car manufacturing in
Victoria and South Australia will be the subject of executive
decisions in Tokyo, Dearborn and Detroit, just as the decision to
close Mitsubishi’s plant in Tonsley Park in 2008 was made in
Stuttgart by Daimler Chrysler.
Mining
tax or not, BHP, Rio and other resources firms are likely to scale
back their investments and output in the short-to-medium term. Even
with major
resource projects in the pipeline, there
are tonnes
of stockpiled iron ore sitting
in Chinese granaries, as warehouses bulge. Copper prices are falling,
and this is never a good sign: copper always has an inverse price
relationship with gold, which is what investors flee to when
stockmarkets plummet.
Even
China runs up against the brick wall of international surplus
capacity. In a global economy characterised by continuous competition
and super-saturated markets (how many flat screens can you really
buy?), not every country can grow at the same time – plain and
simple.
There
are high-growth and low or negative-growth economies; there are
surplus and deficit economies. At present, China and Australia are in
a mutually-complementary growth cycle, while the US, Japan and the EU
(except Germany) are deeply in deficit and in low (US) or negative
(UK) growth cycles.
Do
not believe the snake-oil salespeople (some of whom reside in
Treasury and DFAT), who argue that the Australian economy is delinked
from the US economy; it is not. As the 2008–current GFC proved
beyond reasonable doubt, the global tsunami that emerged from the
wreckage of the US sub-prime mortgage crisis created a ripple effect
that extended far beyond the North Atlantic. Had China not injected 3
trillion yuan into the PRC economy, Australia would have drowned with
the rest of the PIIGS.
There
is No Plan B
Now
is not the time for Canberra to gloat complacently to the rest of the
G20 that its economy is the envy of the world because someone will
have to eat crow, eventually. Certainly, the rest of the world envies
Australia’s abundance of mineral resources and the efficiency with
which it extracts them.
But
the rest of the world does not admire the Dutch disease that afflicts
Australia’s government and business elites, and leaves them in a
state of suspended delusion, transfixed by the belief that the
resources boom can never end.
The
commodities bubble of the late 1970s and early 1980s ended in 1982,
forcing the Hawke government to address the drastic deterioration in
Australia’s terms of trade. Australia’s share of world trade
halved between 1973 and 1983. Hawke and Keating regarded the
Australian dollar float (1983), financial market deregulation (1984),
industrial restructuring (from 1987) and East Asian market
integration (APEC, 1989) as the only means by which Australia could
escape banana republic status.
None
of these initiatives prevented the Australian economy from relapsing
into recession in 1990. Why? Because the global recession – not the
domestically-induced high interest-rate regime – did the damage.
Certainly, domestic monetary policy caused the recession to be longer
and deeper, but, fundamentally, it did not cause the recession; the
complex economic interdependence ingrained in the global financial
system caused it.
What
strategies would the federal ALP government, or prospectively, a
Coalition government, implement in the event of GFC II and a
significant fall in Chinese growth and demand? Neither side of
politics wants to address this thorny issue, as tax cuts and
middle-class welfare dominate a poll-driven agenda and will continue
to do so for the next 12 months.
Foreign
borrowing aside, to which strategies could a Commonwealth government
resort in the event of financial crisis?
We
don’t have the space here to discuss the lunacy of this proposal:
allowing profligate and irresponsible federal governments,
irrespective of their political flavour, to get their hands on the
superannuation cash register?
Keating
clearly isn’t in Kansas anymore. Loading up the banks with
hard-earned pension funds truly is the road to serfdom, as super
funds have scarcely beensuperior
performers of late. Anyone
from the tertiary education sector in the Defined Benefit Scheme will
understand that only too well. Superannuation funds crises are an
accident waiting to happen, but that’s a story for another time.
In
the “dismal science” of economics, there is only one joke and one
joke only: economists have successfully predicted 13 out of the last
2 recessions.
I,
for one, would be perfectly happy to be proved completely wrong on
this occasion.
