The world view

The big economic story of the last three years has been Australia’s incredible performance relative to the rest of the world.

While vast chunks of the developed world went into what is rightly being called the Great Recession, Australia sailed through largely unscathed.

While they are stagnating, we are growing. While they are cutting rates, we are lifting ours. While they slashed jobs, we are preparing for a skills shortage.

Given this, it’s hardly surprising that some entrepreneurs are finding it very hard to connect what is happening in their business with what is happening in the world’s biggest economies.

But it still matters and it may come to matter a whole lot more in the coming months and year.

That’s the message I took from a great speech from Gerard Minack, Morgan Stanley’s local economist, who spoke at the launch of Victoria’s Energise Enterprise festival on Friday.

Minack is a self-proclaimed economic bear, who tends to see the glass as being very much half-empty, but his central point was that the GFC has not fixed many of the world’s big problems (mainly the fact that we have way too much debt) and instead resulting in the problems (and debts) being transferred from the private sector to the government sector.

Minack argued Australia floated through the GFC not because of China’s booming economy, but because of a brilliant policy response from the Government. So good in fact were the stimulus measures that we are now experiencing a bit of a hangover, particularly in the retail sector.

But despite the fact that our GFC never really got going, he argues we are far from being out of the woods because of the problems that still exist in the US and Europe.

Essentially, it all comes back to debt.

The US Government and governments across Europe are deep in the stuff and will need to get deeper as they attempt to kick start their economies and get people spending. Eventually, that will create a big problem in that they are likely to be forced to raise taxes for individuals and companies over time.

But they aren’t the only ones that need to borrow. Over the next two years, banks in Europe will need to refinance €3.2 trillion worth of debt in the next two years.

This demand for debt will increase the cost of debt for everyone, including Australia’s banks, which means business lending rates are not coming down any time soon, and will probably rise.

If Europe and the US were to enter another slowdown, that would also be bad news for Australia. Commodity prices would be likely to fall, and that will hurt Australia’s company profits and tax take.

The other way global problems will hit Australia is via the sharemarket. A struggling US economy will hit US share prices and this will likely flow through to Australian markets and struggling sharemarkets don’t inspire consumers to get out and spend.

Finally, Minack believes the China affect is fading. Yes, the Chinese economy will keep growing, but Minack says we may have already had the lion’s share of the benefits in terms of big jumps in commodity prices.

As I said earlier, Minack is a self-professed bear, and so he does lean heavily on the side of the pessimists.

But it’s food for thought for local entrepreneurs, and an explanation of why the GFC has not changed the fact we live in an increasingly interconnected world.