Monday, 20 April 2009

Australian prime minister finally admits we're heading for recession

I wonder how hard it was for Kevin Rudd, who for so long has seen himself as infallible, to utter the R word today - recession?

In spite of data from at least October last year that a recession was unavoidable Rudd and his band of Keynesian economic illiterates have committed billions of dollars of the next generation's money to the task of avoiding a 'technical recession' - two negative quarters of growth in a row. This is a poor definition of recession, by the way, as inflation can mask a recession and lead to overconfidence in the current situation and bad decision making when tightening of the belt is required. A better definition is two consecutive quarters of negative production.
Prime Minister Kevin Rudd has admitted a recession in Australia is inevitable.

Speaking in Adelaide earlier today he said the worst global downturn since the Great Depression of the 1930s had made it impossible for the Australian economy to escape recession.

"The worst global economic recession in 75 years means it's inevitable that Australia will be dragged into recession," Mr Rudd said. "The severity of the global recession has made it impossible for Australia to avoid a further period of negative economic growth."
Mr Rudd added that while the government could try and soften the blow of recession, it is impossible to avoid.

"The challenge for government is to cushion the impact of recession on business and jobs, through the actions we take, through economic stimulus strategy," he said.
A recession is defined by two consecutive quarters of negative economic growth.

The most recent economic growth figures, covering the final quarter of 2008, showed that the economy shrank by 0.5 percent.

Since then, a host of economic indicators have pointed towards a full-blown recession and some analysts are now tipping an unemployment rate of up to 10 percent by the end of next year.

Economic growth is unlikely to recover until the fourth quarter of this year.

"I expect we'll see a contraction in the June quarter as well as the March quarter," Besa Deda, chief economist at St George told ninemsn. "The June quarter will be tough but we could see some signs of growth indicators."

She added that the first signs of recovery will likely come from the housing sector but that consumer spending will not recover until the end of the year.

Last week, data from Westpac and the Melbourne Institute suggested economic growth is at a 26 year low.

While the government has spent $52 billion on economic stimulus since October last year, including the current $42 billion in cash bonuses currently being mailed to taxpayers nationwide, economists believe the payments have come too late to avoid technical recession.

Regardless of Mr Rudd’s prediction, Australians will have to wait until early June for confirmation of a recession. GDP figures for the first quarter of 2009 will be released by the Australian Bureau of Statistics on June 3.
You may ask yourself was the recession foreseeable 6 months ago, as I claim.

Here is the data. It shows Australia's Services, Manufacturing and Construction indexes first in October and then for March. The graphs show whether markets are expanding or contracting. Above 50 indicates expansion and below 50 contraction (click to embiggen):

October 2008

March 2009

Now, any sane person looking at that first graph and seeing how things had tipped over, coupled with the global financial crisis and decreasing demand from our major export partners, Japan and China, would come to the conclusion that we're headed for a recession regardless of what definition you want to use.

What does Rudd do?

First, he pisses $10 billion up against the wall at the end of 2008. You can see how well that worked by looking at the second graph.

Not finished with his attempt to avoid a recession, Rudd then imperils Australia's financial future by committing tens of billions of dollars on all sorts of ridiculous schemes, nearly all of which will not have any short term stimulative effect.

Look at that second graph. Things are going to get much worse before they get any better.

According to the Brisbane Times (h/t: Andrew Bolt):
The mini-budget contained a provision for the nation’s gross debt to reach $200 billion… There was also the $42 billion for the second stimulus package. Should revenues be substantially worse than forecast in the mini-budget, there may be a need to borrow beyond the $200 billion limit.

This government came to power with Australia in its strongest economic position ever. We had no government debt. It had all been paid off.

In just a few years' time we will have upwards of $100 billion, and maybe double that, in an era in which $10+ billion budget surpluses are a thing of the past. If we achieve $2-$3 billion any time in the next decade then that would be great. That number, by the way, is at least the interest bill Australians will be paying on Rudd's incompetent economic largess. How are we going to pay off such massive debt?

This debt, by the way, doesn't include the impact of an emissions trading scheme on the economy or the yet to be felt impact of Rudd's changes to workplace relations laws, which have reduced labour market flexibility - the very thing needed to help cushion the blow of an economic downturn.

What this government is doing is going to profoundly affect the living standards of all Australians for decades to come.

Rudd is a far, far worse prime minister than the current holder of that title, Gough Whitlam. Hopefully, the Australian people work that out before the next election. However, I fear that even Malcolm Turnbull and his shadow cabinet of Liberal wets would prove to be completely feckless and lack the political will to take the tough decisions needed to pull Australia back to prosperity.

(Nothing Follows)


Anonymous said...

Rudd will surpass Whitlam as Australias most incompetent PM.

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