The Australian Bureau of Statistics released its national accounts data today, which show that the nation’s economy contracted for the first time in eight years during the December quarter, with GDP falling 0.5 per cent. We are on the brink of recession.
The rapidly shifting economic ground is transforming many of our shared assumptions about the politics of capitalism, based, as they were, on 17 years of growth and wealth creation. Despite going to the polls at the end of the second-longest boom in post-war Australian history, the Howard government managed to lose an election largely on the issue of industrial relations reforms which attacked the conditions and decreased the job security of workers.
Little more than a year later, companies are laying off workers in their thousands and both prices and economic growth are stalling. "Yes, times are tough," proclaims an ad for beleaguered car-maker Holden. When an advertising agency comes up with the idea of using an economic downturn to try and sell cars, you know matters are serious.
All of this suggests that the stakes for Kevin Rudd are serious indeed. While his Government certainly didn’t cause the current recession — that was largely the result of problems overseas — he won’t be able to count on voters to understand the nuances of economic causality if the recession is still biting in two years time.
And the chances are that it will be. As we have explored over the last year at newmatilda.com, the Australian economy is vulnerable to many of the ailments that have so sickened the US and European economies. While our banking system remains robust, our household debt and current account deficit are both worryingly high, and our export industries are vulnerable to falling production in the countries we trade with.
Times certainly are tough for the local auto industry, but the same can also be said for Australia’s trading partners. As Wayne Swan rather plaintively pointed out yesterday, much of the rich world is in recession, and inevitably our economy is affected.
So far, we’re doing much better than many first feared. As Reserve Bank Governor Glenn Stevens wrote in yesterday’s announcement that the RBA was leaving interest rates unchanged, "in Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere." Thank your favourite deity that we’re not experiencing the sort of large contraction seen, for instance, in Japan, where an economy reliant on exports is suddenly plunging at an annualised rate of 12.7 per cent.
To make matters worse, the financial crisis in the US is far from over. The recent stock turmoil on Wall Street is in response to the uncontrollable haemorrhages at insurer AIG, which this week revealed it had lost an eye-watering $US61 billion in the three months to December, the largest quarterly loss in US corporate history. The sheer scale of the loss staggered markets worldwide and again forced the US Treasury to bail out the loss-making giant, which has now had so much public money tipped into it that it is essentially owned by the US taxpayer.
The AIG debacle in many ways encapsulates the story of the larger US financial crisis. The massive insurer is at the heart of the complex web of toxic financial instruments that have brought the world’s financial system to the brink of ruin over the past 18 months. As Joe Nocera explains in the New York Times, it was AIG that offered and sold the now notorious credit-default swaps that many financial institutions used to insure their equally infamous collateralised debt obligations.
For this reason, President Obama’s economic advisors, led by White House advisor Larry Summers and US Treasury Secretary Timothy Geithner, believe AIG cannot be allowed to fail — or even receive a downgraded credit rating. The result might well be a global implosion even worse than the crisis which followed the failure of Lehman Brothers in September.
The economic earthquake is changing the way economics is discussed by the media, politicians — and also by citizens. The current Queensland election campaign, for instance, has already taken on an unusually economic flavour for a state campaign. The election was called soon after Queensland was downgraded from a AAA credit rating by ratings agency Standard and Poors — a decision defended by Premier Anna Bligh as necessary to the continuation of her government’s ambitious, debt-financed infrastructure program. Meanwhile, LNP Leader Lawrence Springborg has promised to slash $1 billion in public sector "waste" in order to pay down government debt and regain the much-coveted AAA rating.
Just why any Australian government should care about risk assessments by the very same ratings agencies which helped cause the current financial crisis is a question only John Quiggin seems to be able to ask. After all, no Australian government has ever defaulted on any bond debt — ever. Even so, Queensland’s taxpayers will now have to pay more for their state’s debt, owing to the ratings agency’s decision. And the election is rightly being seen as a harbinger of what future federal campaigns might look like.
I went to a dinner party on Monday night in Brisbane. When it emerged that I am a journalist, one of the people I met there asked me if I liked Kevin Rudd. This is a question I am often asked when I tell people I am a journalist. For the record, I have never met Kevin Rudd and don’t have an opinion on him as a person. This being a dinner party, I answered that I thought he was a "smart politician." I used to say this about John Howard too.
The next topic of conversation was Kevin Rudd’s $900. My friends at dinner were rather horrified by the fact Kevin Rudd is giving away $900. One of them is on a PhD scholarship and so thinks she will not receive it (this is correct: she will not). Another was concerned that people would simply save it (the ABS data says we did spend the handouts we received in December), or that the money would go to things produced overseas, like flatscreen TVs.
Of course, dinner party conversations are well known traps for the journalist in need of an anecdote, but this story illustrates two broader points. Firstly, many people are confused about the current economic crisis. After decades of governments of all persuasions boasting about budget surpluses and being "economically conservative", few ordinary citizens understand the concept underlying Keynesian economic stimulus, even if they might intuitively grasp the idea of the paradox of thrift. Another example: because of the way the economic stimulus package was reported, my dinner party friends think that most of the $42 billion will go to the $900 payments, rather than to infrastructure projects like public housing and new buildings for primary schools, which is in fact where the majority of the package will go.
The second lesson I drew from this conservation was that the economic stimulus package is strongly identified with the Prime Minster. I hear people talk about "Kevin Rudd’s $42 billion" and "Kevin Rudd’s $900" quite a lot. This is a significant point, with both opportunities and threats for his Government. If Australia slides into a long and deep recession accompanied by a large government deficit and ballooning public debt, there is every likelihood that Labor — and Rudd — will be tarred with this association. Just think of the way that people still talk about "Paul Keating’s 17 per cent interest rates."
But if Australia can somehow dodge the bullet, Rudd and Labor will have an excellent chance of repeating Peter Costello’s boast after the 1998 Asian crisis that it was sound economic management that achieved this. In the meantime, the Rudd Government’s strategists will be watching the Queensland result like hawks.
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