Can the Australian economy avoid recession? A SmartCompany Q&A

It’s the best economic news we’ve had for awhile – Australia’s economy actually grew by 0.4% during the first three months, helping the nation avoid the dreaded technical recession (as defined by two quarters of negative growth).

But as Prime Minister Kevin Rudd said yesterday, we’re not out of the woods yet. Can the Australian economy avoid a recession over the next 12 to 18 months?

Time for a SmartCompany Q&A.

Our economy is growing, the sharemarket is back above 4,000 points and I’m feeling optimistic. Am I getting carried away?

No way. Things have been gloomy for so long that it’s good for everyone to wear a smile for a few days.

Besides, hopefully we’ll see a real psychological benefit to avoiding recession.

Consumers may become less cautious and dip into their pockets, and businesses might dust off their investment and growth plans.

Malcolm Turnbull says economic growth was due to a surge in exports, but Kevin Rudd says it was because of his handouts. Who is right?

They both are. The Government’s stimulus measures appear to be working, as can be seen from retail sales data and investment in new homes. There is an issue about the debt we’re racking up because of these measures, but Rudd argues quite rightly that he had to act quickly and decisively.

But the contribution from exports took everyone by surprise, particularly as most of our big trading partners (Japan, the United States and Britain) are in recession. China, which keeps ticking along nicely, has clearly helped us out.

However, some doubt has been thrown on the export figures by Morgan Stanley economist Gerard Minack, who argues the Australian Bureau of Statistics has subtly changed its model.

“Usually the Bureau waits for the major contracts to be settled, and factors in the price changes in the June quarter (because the contract prices are set from 1 April). Yesterday it announced that it was actually factoring in lower prices in the March quarter. Factoring in a lower price implied a higher volume for exports, which lifted GDP.”

Hang on, so the figures were wrong?

Not really – remember, put five economists in a room and they’ll all come up with something different.

Minack’s point is that whatever the official GDP figures say doesn’t change the fact that things are going to remain tough.

“It doesn’t change the fact that on any sensible definition Australia is in recession,” he says. “Nor, more to the point, does it change my view that things will get worse.”

You’re bursting my bubble here. Given we’ve avoided the recession and there are now signs of economy around the world, surely we can dodge the ‘R’ word now?

There are certainly plenty of economists who support that view. Craig James, the chief economist at CommSec, has declared that the worst of the economic slowdown is now over.

“It is becoming clearer by the day that forecasters became too pessimistic, failing to give equal weight to the responsiveness of policymakers as to the fundamental problems faced by the US economy.”

“One thing is clear – Australia went close to talking itself into recession. Our economic conditions were nowhere near as bad as other parts of the globe, but somehow we all thought they were as bad.”

“If Australians focus on the opportunities that lie ahead then the rebound could be much quicker and stronger than envisaged only a month ago.”

James says that while the economy will probably grow by only 0.6% in 2008-09, he expects growth of 2.1% in 2009-10 and 4.1% in 2010/11.

That’s the sort of news I like. But I am guessing not everyone is as upbeat as that.

Helen Kevans from JP Morgan argues the devil was in the detail of the GDP figures and points particularly to the slump in business investment, which fell 6.1% in the first quarter. As businesses cut back on investment, they also cut back on employment and that could spell trouble ahead for our economy.

“This has serious negative implications for the employment outlook, reaffirming our view that the jobless rate will rise sharply,” Kevans says.

“Rising unemployment, the massive wealth destruction underway in the highly-leveraged household sector and tighter lending standards mean that consumer spending will remain subdued going forward.”

Looks like it’s all about unemployment. How high it is expected to go?

Federal Treasury forecasts see the unemployment rate peaking at 8.5% in 2010-11, but economists are tipping it could get as high as 9% or even 10%.

Ouch. Is there a chance we can avoid this?

That probably relies on the global economy recovering much faster than anticipated. Which is possible, although Federal Reserve chairman Ben Bernanke was a bit lukewarm on the prospects for a speedy recovery in a speech this morning.

Let’s hope China can continue with its solid recovery – that will really help underpin our economy.

That’s the positive attitude we like.

Indeed. Perhaps we should all take a moment to consider this comment from Craig James, who argues recessions are bit like getting old – it’s more about your state of mind than the actual numbers.

“If the near-death experience of the economy has taught us anything, it is not to count your chickens before they hatch. Forecasts for economic growth and unemployment are just that – forecasts. That’s why businesses and consumers should spend more time looking at their balance sheets than worrying about what may happen.”