Thursday, April 02, 2009

There is no recession in Australia

Economics is a funny ol business. It's all about confidence, which is what the G20 group of world leaders has been trying to do in London. That is, instill confidence in the rest of the world to spend, spend, spend. Consumers: buy stuff. Capital owners: invest. Reporter: "what would it take for this conference to be a success". World Leader: "for you to report it as a success".

For some reason, France and Germany have a different agenda. They want to develop a new economic order. Which is laudable, but the world is currently in panic mode, and first things need to come first. Meanwhile, America and China are working on that new order anyway at the highest level (at the London talks, Obama and Hu Jintao got together, releasing a joint communique twice the length of that of the US and Russia). Which is about what you'd expect, given the changing nature of global economics over the past 15 years.

Confidence took a tumble courtesy of the unstable nature of capitalism. That and a frenzy of unviable home lending in the US (subprime) which was subsequently wrapped into little-understood securities to spread poison thorought the world's financial institutions, which subsequently took a tumble, refused to trust one another, refused to lend to businesses, which business subsequently started laying off staff, which meant those that went stopped spending and those that stayed were too scared of layoffs to spend. Enough of them anyway.

Australia's a bit different: if you can't make the mortgage repayments, you still owe: you can't leave an empty house as complete settlement of debt. Further, the banks have greater asset-backing requirements, so are in good shape. Still, the global market downturn has greatly affected Australia's resource exports, and subsidiaries of foreign companies - such as GM-Holden - are not immune.

Confidence. Australia is not officially in recession yet. The government and other authorities have been at pains to point that out, trying to prop up confidence. But it has been as good as admitted that when the next quarterly figures are released, Australia will officially be in recession.

The government's financial stimulation packages (effectively giving away money) have had some effect. Consumer spending over the past quarter hasn't really sunk - as it has in other countries. But people have to a fair extent been squirrelling away the bounty. All it has really shown is that it can have an effect, but to have the desired affect needs a substantially greater sum than has been spent so far. So even if the World Bank and OECD can laud Australia's initiatives and give a tick to the (relative!) robustness of the economy, there is a lot further to sink before enough confidence returns.

* A note related to the title: OECD data confirms New Zealand has been experiencing negative GDP growth since the beginning of last year (and thus almost a year into recession). Quite a surprise to hear that on the radio yesterday. Australia, by comparison, has yet to hit the second quarter of contraction which officially defines recession.

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