Last Wednesday’s national accounts showed Australia is very close to technical recession. Most commentators agree that we’re just splitting hairs — the recession has begun. So what happens next and what role does the stimulus package have against a darkening economic sky?
There was some practical advice from the Federal Government in weekend newspaper advertisements — get your tax returns in if you haven’t already, and if you’ve changed bank account, let us know, the money is coming in April.
We’ve heard a lot from the Prime Minister about the need for speed. Pump-priming the economy must happen now, and the Opposition should just get out of the way.
But are there other policy reasons for the timing of the stimulus package? I suspect the answer is yes. The national accounts for the December quarter show a shrinkage in GDP of 0.5 per cent. They are not great numbers — and they raise the question: What next?
Commodity prices in general have been falling back to earth, and for coal and iron ore they’ll hit the ground this April. Australia’s producers are currently negotiating with China over the contracts that will set the prices for these two commodities for the year beginning 1 April.
You don’t need a crystal ball to predict the likely outcome. China produces a vast amount of coal itself (40 per cent of world overall production), many times the amount it buys from us. It has domestic capacity in coal production on a huge scale. Years of double digit growth however meant that demand exceeded supply, and Australia was one of the countries that made money picking up the considerable slack.
At its peak, China was building a new coal-fired power station every eight days in a country where about a billion people still don’t have electricity connected to their homes. At the same time, China’s booming construction sector has required steel on a massive scale, and we have been able to sell them the key inputs of coking coal and iron ore at a high price.
But as China’s economy has slowed in response to the global economic crisis, Australia’s much-touted economic lifeline has started to unravel.
Australian negotiators know they’re going to take a hit. The standard prediction, depending on who you ask, is that the contract prices will fall between 30 per cent (according to Goldman Sachs) and 50 per cent (Access Economics). That is huge — equating to a fall in GDP of around 3.8 per cent (although it’s not terminal, and should be seen in the context of the unusually high prices we had been enjoying during the boom).
When these new prices are announced, expect the dollar to go through the floor (probably a good thing overall) and the commentariat to start hyperventilating.
With that going on at the same time as we’re hearing messages designed to prop up confidence in the economy (both consumer and business), it’s clearly to the Government’s advantage if the punters happen to be looking the other way in April, focusing on — for example — which new plasma screen to buy, since someone was nice enough to have just handed them a wad of cash.
It would be naïve to imagine that the Government hasn’t given a lot of thought to precisely these issues, and how they will play in the public mind. Nonetheless, there are compelling reasons for the stimulus package, and it is sensible, well-timed and well-aimed policy — in the short term.
But a problem remains. Keating’s famous banana republic line still rings true. Australia’s economy has a structural problem, a dirty little secret that was hidden from view by the booming commodity price fig leaf. That secret is that we are overly reliant on digging things up and shipping them off. Then we buy back things made from the stuff we dug up. Value is added, jobs created and profits are realised off shore.
The long term trend in commodity prices (before China and India started firing on all cylinders) was down. Now that the commodities boom is over, have we wasted the money?
The Howard years saw very little investment in critical parts of the economy. We failed to build up our workforce through proper funding for education and training. We failed to invest in infrastructure and build our capacity in other areas. We woefully failed to invest in research and development. We are dangerously close to becoming a country that doesn’t make stuff — an economy wholly reliant on the service sector (in a time of belt tightening), agriculture (in a time of drought and climate change) and mining (in a time of global recession).
The legacy of the Howard/Costello years may yet turn out to be a diminished Australia. We had all the cash in the world and totally failed to do anything useful with it. Now let’s hope that China doesn’t come down with the severe dose of the flu — if that happens, we’re headed for life support.