Gerard Minack

Gerard Minack is chief economist at Morgan Stanley Australia and is known as one of the big “bears” of Australian economics, thanks to his decidedly glass-half-empty take on global economy and particularly the Australian housing market.

In today’s interview he explains why Australian entrepreneurs do need to remain wary about the state of the global economic recovery, why he’s still worried about the housing market and why the gap between the last downturn and the next one will be shorter than expected.

Do you think Australian SMEs are underestimating the risks in the global economic growth because we sailed through the GFC so easily?

I think part of the disappointment that people have felt this year is because they thought we avoided the worst last year and 2010 would be better. Instead we saw payback for some of the reasons we did so relatively well last year and we will have just an okay year. There will be jobs growth, there will be GDP growth, but it’s just that after last year people in a sense prematurely extrapolated the good times and thought they would get even better.

And was that feeling exaggerated by the fact that we did look bullet proof last year?

That’s absolutely right. The way I look at it, if you lived in the burbs of Melbourne and Sydney last year, every time you went to fill up your car, you got a little bit of change back because petrol prices fell. Every time you went to the letterbox they sent you a new cheque from Kevin. If you had a mortgage, it kept on coming down. And you kept your job. What’s wrong with that picture? Nothing, that’s fantastic.

This year, you’ve still got your job, but it’s not like you’re an American who lost their job and got it back, which is a huge improvement. No one lost their jobs here but it’s costing a little bit more to fill up the car, the mortgage has gone back up and there are no more cheques. It’s not that things are bad in the absolute sense, but they’re certainly not better than they were last year and I think most people expected them to be better.

I think one thing SMEs struggle with is trying to get a sense of how things that are happening overseas might impact them. Why does what’s happening in the US and Europe matter so much?

It matters in many ways. For example, the most interconnected industry in the world is finance. Money flows all around the place, all the time. Because there’s a mad scramble for funds now, rates for private sector borrowers are under some pressure and that’s feeding through to the funding that our banks need to give us the loans. So that’s the first way, we’re seeing spreads increase and we’re also seeing bankers become more cautious. So a lot of your readers are probably finding it a little more difficult to get bank finance today than they did three years. So that’s the first concrete way.

The second is our investment markets. Investment professionals wake up in Melbourne and Sydney everyday, look at what Wall Street’s done and take our lead from there.

And finally, although China has done very well and it certainly punches above its wait for commodity markets, it isn’t yet large enough to single-handedly hold those markets. Let’s not forget commodity prices did collapse in 2008 and if we have renewed downturn in the developed economies, even if China keeps growing, we’ll see the price of our commodities come off and that effectively is a cut to our national income.

Which will be felt at Federal Budget time.

At Budget time, by the miners and in consumer sentiment. If that happens, we will not be getting back to surplus as quickly as forecasts have it now.

Can you talk about the funding situation a bit more? There is €3 trillion of debt to be refinanced in the next two years, so I gather there’s probably another couple of trillion in the two years after that.

Well, that’s just the Europeans. Banks in the US have a similar problem and our banks are quite big borrowers on global markets.

We used to live in a world where everybody was willing to be leveraged, in a world where people were willing to give money to banks because, hey banks are safe. Well guess what? People aren’t so willing to be leveraged, they are now thinking a bank isn’t as safe as we thought it was.

And although our banks did relatively well, they are paying the price for that.

How long is that credit squeeze is going to last?

What we saw a couple of years ago by historical standards were very low interest rates, very low risk spreads. We won’t be going back to those levels for some time. As we shouldn’t, you shouldn’t be gibing mortgages to people that have no income, no jobs, no assets, like the NINJA loans in the US.

There’s another issue here which is the pot of money that the banks have got, they were willing to give it to people to buy homes last year and were quite restrictive for business. So I think one thing policy makers have to address is to say, “Well look, we can’t be as free with our lending as we were but let’s be a bit more restrictive on the housing and loosen up lending to the people who actually build stuff and employ people.”

Now that’s an issue for policy makers and the banks to sort. I’m not saying that’s easy but I think that will be a focus, particularly for the Federal Government after this election.