Friday 24 March 2017

Boom or bust

Geelong Advertiser, Saturday, 3 March 2007, p. 13

The Australian stockmarket took a dive earlier this week. A needed correction or the end of the most recent long boom? That is the question, as Hamlet might have said, had he been an economist and living at this hour. Are Australians living in a fool’s paradise, believing that they have found the secret of sustained economic prosperity, or are they teetering on the edge of a precipice? It is equally easy to be Pollyana or the merchant of doom, but the current economic situation is, at the very least, more volatile than it has been for some time.

Australia’s current expansion is underpinned by four elements: the growth in demand for raw material resources primarily emanating from China, the continued health of the United States’ economy, a massive current account deficit produced by large-scale borrowing from overseas to finance current consumption and investment in real estate, and the fiscal and financial policies of the Federal government which have permitted this skewing of domestic investment. You could almost foresee a visit from a modern Sir Otto Niemeyer with the message that Australia should get its house in order, as happened at the onset of the Great Depression in 1930. Mind you he would also have to visit the United States with a similar advice. Alan Greenspan, the recently retired head of the Federal Reserve Board, hinted at a depression on the way if the United States did not cut its own expenditure and its dependence on foreign resources and on the willingness of other countries to finance its own current account deficit.

In the short run the growth of the Chinese economy can be expected to be slower than that which has occurred in recent years. Though fears that it would introduce a capital gains tax have receded, there are indications that government policy in that country will have to be directed more to improving the efficiency of energy use and reducing greenhouse emissions, which will impact on economic growth. It will also reduce demand for Australian mineral exports. The United States goes into an election year with a hugely unpopular civil war in Iraq and a potentially critical situation in Afghanistan costing billions in resources and a significant toll in American lives not to mention the far greater numbers of Iraqis and Afghanis who are dying. Though Al Gore may not be a candidate for president, his message about the effect of the United States on climate change may be gaining some traction in his own country. If both China and the United States experience slower growth there is no way that Australia can be unaffected.

Here in Australia the Federal government has paid off its debts, which is a good thing, but largely as a result of windfall gains in taxation thanks to the boom. Despite pre-election handouts, the combination of bracket creep and the underestimation of revenue growth has enabled the government to generate huge surpluses in most of the last several financial years. The government prides itself on its economic management, but in reality much of this gain has come from export-led growth which owes little to domestic settings. Until very recently little of this extra revenue had been devoted to infrastructure investment, building the capacity for future growth. We have not used the good times well. Even the current plans for the Murray-Darling basin are driven more by political than economic concerns. So investors might want to be cautious about the short-term future, though the paradox is that a decline in overall investment would probably increase the likelihood of a recession.

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