The sky is falling, the sky is falling. Australia is in a recession and unemployment is going up. Treasury estimates a contraction of 0.5% for this year and unemployment hitting 8.5%. Many others think this is optimistic and that we are in for a deeper and longer downturn.
Maybe they’re right.
But I’m an optimistic sort of person and I can see reasons for hope. The basis for my hope is that the Australian economy is fundamentally sound. Our monetary policy has been stable and balanced, our fiscal policy has been (until this year) equally good. Our financial system doesn’t have significant distortions and we have a relatively flexible economy.
I have said previously that this recession was imported from America. Not much we could do about that. And given how integrated our economy is with the world economy we were destined to feel some of the impact. Failure to anticipate the consequences of an American recession may have led to an under-estimate of the risk premium in Australia… but that mistake was (I think) relatively small and has already been fixed.
We will see less demand for our exports, including commodities. It may also be harder to raise capital on international markets. Both of these things will hurt Australian businesses, jobs and wages. Some businesses will go broke, some people will lose their jobs and the economy will contract.
And then it will recover.
During this downturn not one tractor has spontaneously combusted, skilled workers have not forgotten their trade, and no land has disappeared. Market economies face creative destruction all of the time and while the destruction makes the news, the creation is just as continuous. Prices will adjust. Resources will shift into productive parts of the economy. New businesses will be started and (as I said earlier this week) new investments made and new jobs created. The AFR today reports that business lending is rebounding, which is exactly what you would expect from a market economy.
The doom scenarios are appropriate for America, where there has been a significant mis-allocation of resources and a dramatic adjustment is necessary. But Australia is well positioned to ride out this storm and then continue growing on the other end (though perhaps not as fast as Treasury predicts). The biggest risk to this, in my opinion, is that current government policy will cause ongoing damage by slowing down private investment and distorting the market.
Sadly, when the economy recovers the government is going to try and take credit. This would be wrong. Our economy recovers naturally despite the government, not because of them.