Tuesday, July 07, 2009

Comparing two economic recovery programs

THE global recession continues to worsen, but the Australian economy is showing signs of recovery.

So goes one breathless media report. Though for the moment, recovery or not, the Australian economy is is far better shape than many others. According to my preferred economic commentator, Ross Gittins of the SMH, a key factor is:

“China's continuing demand for our mineral exports was the main reason for the economy's surprisingly strong performance in the March quarter (at a time when the G7 economies contracted by 2.1 per cent).”

Curiously Canada, with a similar economic dynamic, is not traveling so hopefully. I guess what I'm looking for here are the salutary lessons. Canadians tend to blame the bigger US economy for all there woes, but that probably is an over simplification. At the same time it would be an over simplification to say Australia was free and clear.

The new chief economist for Merrill Lynch Canada has finally landed and published a forecast that is significantly more optimistic about the Canadian economy in the short run, but less enthusiastic for next year. She projects that the Bank of Canada will get carried away with the surge in growth, scale back its economy-fuelling measures too fast, and undermine the recovery.

Australia's Rudd government quickly admitted the economic downturn and put in place a range of stimulus packages, essentially encouraging consumer spending, to counter negative effects on employment. Our central bank recognised the efficacy of the approach and tailored the rates changes to support the moves. Our conservatives bleated and are still bleating.

Canada's conservative Harper government initially rejected the stimulus concept and the central bank dropped rates, encouraging doubtful borrowing. It is one of those things were poor choices are made at the outset the tend to continue on. A second major factor must be the influence of China on the respective resource sectors.

Despite significant commercial argy-barge over pricing, China has continued to buy Aussie iron ore and coal, remaining the countries largest customer. In Canada China is focusing on buying the companies rather than the resources. It's worth noting that some of those companies have significant holdings in the Australian market.

So is there a lesson? It seems to me, admitting certain prejudice, that Canada is still stuck in the discredited conservative stream while Australia seems to be operating from the new pragmatism – let's do what is most likely to work. We really don't know what is happening behind the scenes with Rudd or with China, but at this stage it is working. Whether it really works only time will tell, but we are off to a good start.


lindsaylobe said...

Hi Cart
Whilst I agree with your summary, nevertheless I remain sanguine about over future due to past over reliance on credit creation/ private debt and commodities. Despite recent more encouraging data bear in mind as the effects of the stimulus package wear off and temporary demand for building falls away as the first home buyers grant is scaled back, we could easily fall into nasty negative territory.
Our lInk with China to work more closely is the only bright spot.

Unfortunately for our friends In the USA and Europe (due to private debt deleveraging) the position is much worse – USA deleveraging of private debt is swamping any favorable effects of the stimulus package- estimated by some economists to be as much as a $4 trillion per annum turnaround in private debt reduction or credit. Worried savers are not spenders. An economy which was previously totally dependant on unsustainable credit and private debt increases for so many decades for its economic growth must necesarily contract during any transition period before reaching a more sustainable level.
Demand is already being trumpeted for a further stimulus package which I am afraid will be the equivalent of using a bucket brigade to bail out a sinking Titanic. Its not that Obama is doing anything wrong or indeed there are many alternatives other than to cushion the burden - it’s just going to take a lot longer than was anticipated before private saving reduces private debt to a sustainable ongoing level. The huge government debt is yet another question mark. I don’t think Australia or Canada – (Canada however is more tied to the USA) - will be immune from the fallout.
It’s hardly surprising that home prices in the USA continue to fall with the latest forecast extending the misery into 2011. I wish I could sound a little brighter and see a few green shoots actually sprouting. I am afraid I must reluctantly conclude many economists are missing one vital uncontestable point – past unsustainable private debt and credit creation created an economy totally reliant on continued debt creation for any real growth. The reversal to a nation of worried savers must generate negative real growth in the transition phase until the system reaches a more sustainable overall level to a manageable total debt level. In the meantime higher unemployment and credit card and home delinquencies continue.
The turnaround is going to take far longer than was previously thought by both this administration and most other leading economists.

Best wishes

Cart said...

Sorry Lindsay, I was still being simplistic. I realise it is not all beer and skittles and technical recession doesn’t reduce actual, in the sense that 1% employment growth is not the 4% realistically required.
I guess my main argument is that Australia has taken some positive steps, more so than other countries. Ho it pans out is another issue completely.