Added on: Friday, November 21st, 2008 8:26 am
Keywords: Deposit Guarantee, Global Financial Crisis, IMF, K.Rudd, RBA, Recession, S&P/ASX200, Stagflation
If you listen to Treasury Secretary Dr Ken Henry, he’ll try to convince you that Australia’s Gross Domestic Product (GDP) will only slow to 2% this financial year. Then again, the good Dr has also been accused of fudging his economic growth forecasts to suit the Federal Government in an attempt to convince us that we will likely avoid a recession.
So what’s the prognosis?
There’s no doubt that things will continue to get worse before they get better. However, there are three questions which continue to concern me:
1. How much worse will things get before they start to improve?
2. Will we go into recession here in Australia?
3. How long will it take before the economy recovers?
Now I don’t want to seem like a pessimist, but there is no good news on the immediate horizon!
We are in the grips of a global economic meltdown…possibly one of the worst in history. So be prepared for things to get significantly worse and be prepared to take your medicine for your excessive credit and spending sins of the recent past.
Recession here we come
No longer can we rely upon the de-coupling of Australia from the rest of the global economy and the belief that we will be buoyed by the continued growth of China and other emerging economies.
China’s growth rate has slowed to its lowest level in five years and the Chinese Government is also being forced to cut interest rates and dish out a $1 trillion dollar rescue package. At the very least, these two actions alone should raise some alarm bells.
In Australia, one of the biggest problems the policy makers are likely to face is the threat of stagflation. As growth is certainly on the downward spiral and unemployment is set to increase substantially over the coming year.
The International Monetary Fund (IMF) recently predicted that Australia’s economic growth for 2008-2009 is likely to reduce to only 1.8%.
The Reserve Bank of Australia (RBA) stated it was only likely to reach 1.5% by the end of the December 2008 quarter.
Amidst the myriad of the various numbers being reported, the Official Cash Rate (OCR) is also speculated to be cut by a further 0.75% - 1% at both the December and February RBA Board meetings dropping the OCR from it’s current level of 5.25% down to a low of just 3.75%. At least this is what the futures markets are currently predicting.
But just in case you thought it wasn’t possible – think again! The global central banks have already indicated that they will drop rates to 0% if necessary and do whatever they need to in order to prevent a global recession.
What recession?
K. Rudd’s recent Fiscal stimulus package announcement of $10.4 billion has been designed to boost the spending and confidence of the economy and encourage the consumer to spend, spend and spend some more before Christmas….so put him in a red fat-suit, slap on a little facial hair and some platform boots and call him Santa!
More seriously though, one has to wonder why such a package has been implemented with such haste……ahhh there must be something that the Government is not telling us? Either that or they are simply refusing to accept the fact that Australia is likely to fall into a recession along with the rest of the world?
Let’s face the facts.
The entire global banking system is now under a guarantee of one sort or another simply to avoid a complete collapse of the industry. As a result, Governments now own some of the world’s largest banks whilst they have selectively left others to collapse completely.
The US car manufacturing industry will also be given its own rescue package and insurance giant AIG was only barely rescued from the brink of destruction….so it’s affecting every industry!
The obvious question is ‘who’s going to be there to prop up the Government’s as they rapidly turn the surpluses of the past into the deficits of the future? More importantly, we…us…you…are paying for the collapse of the global financial system in one way or another through increased taxes, fees or charges, financial stress and loss of jobs simply to fund the Government guarantees. The most important question is whether better regulation could have prevented this?
Oh yeh…just in case you missed it, the US has been in recession for months now, but has only just admitted it. On a positive note, they are no longer alone with most of Europe currently feeling the pinch….so they are in very good company!
Global property markets are in turmoil, credit is incredibly tight, banks are being propped up by their Governments, surpluses are rapidly becoming deficits, consumer confidence is shot, credit spreads are still wide by historical standards, Government stimulus packages are being handed out like candy at Halloween and none of the tricks or treats appear to be working to stem the flow of money away from the markets. Global equity markets have lost their gains of the past 4 years, currencies are up and down like a yo-yo and Governments and central banks are in a tail-spin trying to fix many of the problems they neglected to identify in recent years.
You only have to look at the incredibly poor execution of the Deposit Guarantee introduced by the K.Rudd Government and the continuing aftermath of questions as to what it means, how it can be used, who will pay for it and ultimately the impact of the fundamental shift in the way banks will now operate to know that the Government has dropped the ball on many issues.
Recent key indicators tell us just how bad things really are in Australia. Retail sales are down, Housing Finance has slumped, Unemployment is on the way up (and is likely to get significantly worse), House Prices are down, most of corporate Australia has collapsed, the OCR is being feverously cut, growth is slowing and inflation (CPI) is still on the way up. The Aussie dollar has fluctuated from 98 cents down to the low 60’s in a matter of months, the Government can’t spend money quickly enough to try to ignite economic activity and the local banks continue to increase provisions of bad loans. The most recent estimate from CBA indicates a full financial year loss of as much as $2.3 billion.
The domestic sharemarket has slashed nearly all gains of the past four years with the S&P/ASX200 closing at 3697.3 on November 14 down 45% from its end October 2007 highs.
Short selling has been temporarily banned, many funds have closed due to a lack of liquidity and the Government has been forced to intervene into financial services to effectively provide liquidity to a market segment it did nothing to regulate prior to the development of the crisis.
So how long before the symptoms clear up?
Unfortunately, there is no magic cream or miracle bandage to sooth the itch or cover the deep cuts inflicted by the current crisis.
Whilst many forecasts suggest that we may be near the bottom (got to love the optimists), the IMF’s World Economic Outlook recently forecasted that world growth was likely to slow to just 2.2%, down from 3% and the world will likely face the worst recession since WWII.
According to the IMF, a global recession can be declared with a growth rate lower than 3%.
Describing the current environment as one where consumers are “deleveraging” (borrowing and spending less), the IMF continues to urge the world’s central banks to cut rates further in order to perpetuate some economic stimulus and to prevent deflation.
Continuing the trend at these levels emphatically confirms that the global economy is not too far from the very real threat of a prolonged global recession – and this is obviously not something that can be turned around quickly.
On the positive side, some economists forecast that the global recession may only last 12 months (yeh right!) and the rest have suggested that we have seen the beginning of the end of capitalism!
Trust no one, this is an unprecedented event and ultimately nobody really knows when this global disease will be cured.
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