Not A Recession, But It Might As Well Be

EDITORIAL THURSDAY 04.12.08.
The release of the latest national accounts figures confirm the worst fears of many. That is, Australia is on the precipice of a recession. Of course, the glass half full view would be that economic growth remains positive, although only just. The official growth figure for the September quarter has come in at 0.1%, so close to zero that for all intents and purposes it is fair to say that the economy has come to a sudden halt. The only thing that prevented a negative growth figure being recorded was an improvement in the farming sector.

Some are still clinging to the hope that an actual recession can be avoided, and that may well be possible. The widely used definition of recession is two successive quarters of negative growth, and so far we haven’t even had one. However, the slowdown has been dramatic, and reflects the earlier evidence of retail figures. Today, there is even more evidence with car sales figures plunging a startling 22% last month. Even more startling is that despite official interest rates falling, the cost of car finance is actually rising.

This reflects a wider phenomenon which has seen interest rates on business loans fail to fall in line with mortgages. Credit card rates also remain high. One of the reasons for this is the risk weighting of the price of such loans, but the problem is that it adds to the drag on the economy, and almost becomes a vicious circle as cheaper finance becomes harder to obtain at the very time when it is needed most.

It’s not just consumers and businesses that are finding credit difficult to obtain. One of the unintended results of the Federal Government bank deposit guarantee has been to make it harder for State governments to attract finance. As a result, the Federal government is reported to be considering acting as an investment banker to the states, borrowing funds, and relending them to the States. The opposition leader, Malcolm Turnbull, is drawing comparisons with the Khemlani Loans affair of the 1970’s which helped to destroy the Whitlam government.

While the government is holding fast to its forecast of 2% growth, it is a prediction which is looking more and more like wishful thinking. Despite the fact that Australia’s position is much more robust than many other countries, we cannot completely insulate ourselves from the impact of what is happening around the world. The truth is that if there is a further shock to come from international markets it could well push our country into recession.

To some extent, that is not really the great cause for concern that some people see it to be. Whether Australia’s economic growth dips a little below zero or stays a little above it, the real damage has already been done. Either way the Australian economy has been hit with a sledgehammer and arguing over whether or not we are in a recession isn’t going to change that. What is important is for our government to use our relative strength to help shield the vulnerable from the storm in the short term, and more importantly to invest in the capacity to create future prosperity in the long term.

Part of that depends on the ability of the State governments to obtain funding to continue investing in infrastructure. That’s why the idea of the Federal Government borrowing to provide finance to the States for infrastructure programs is not the reckless idea that the opposition pretends it to be. Sometimes it’s hard not to get the impression that Malcolm Turnbull would rather that the government did nothing about the Great Financial Crisis.