EDITORIAL FRIDAY 12.12.08.
It’s a sobering piece of news to hear that the financial market collapse for the calendar year is set to go down in history as the worst ever. That’s right, the fall in Australian Sharemarket values has now exceeded the decline in 1930 as the Great Depression took hold. With only two and bit weeks until the end of the year, it’s pretty safe to say that any rally in the market big enough to prevent that result would be nothing short of a miracle. So the obvious question is: does this mean that we can expect the coming economic slowdown to also reach record proportions?
First, all of the warm and fuzzy advice we have been getting about Australia being better placed than most is actually true. The Federal Government is in a sound budgetary position, the big banks are solid despite having to write off some bad investments, and the balance of trade is actually improving because of the lower dollar and stronger exports. While we are not immune from the effects of the Global Financial Crisis, we are in a position to cope with it far better than most.
Second, while many people are working hard to reassure us all about the strength of the Australian economy, it is also important that they are working even harder to boost the economy in practical ways. One of the reasons that the Great Depression lasted as long as it did in the United States was a reluctance to intervene until Franklin Rooseveldt turned the tide with the package of nation building policies he called the “New Deal”. Barack Obama won’t be sworn in until next month, but all the indications are that he is keenly aware of the lessons of history.
While it remains to be seen just exactly what the new United States President will do after he takes office next year, here in Australia our government is already acting to intervene in the real economy with its economic stimulus package and now the new nation building plan. Other governments around the world also seem to be far more aware of the need for intervention now than was the case during the Great Depression. The same is also true for the various central banks, all of which have been aggressively cutting interest rates to help encourage economic activity.
Having said that, there are no guarantees. As unemployment rises, consumer spending will fall, dragging the economy into a negative spiral. That’s why employment is the key, and why the infrastructure programs being rolled out by the government are important not just to build capacity but to create jobs. If it works, any recession will be relatively mild. Of course, if the global crisis is sufficiently damaging it may turn out that the measures taken by the Australian government are not enough to head off recession. Even so, in a worst case scenario, the efforts of the Government and the Reserve Bank to ameliorate the effects should mean that the downturn will not be as severe as the Great Depression was.
Either way, there’s no escaping we are in for a bumpy ride.