Survival skill? Prepare for the recovery

The global financial crisis is taking its toll on trade.

In fact, according to new Austrade/Sensis research, exporter confidence levels have slipped below those of non-exporting Australian small and medium sized enterprises (SMEs) for the first time in nearly five years.

In fact between February 2004 and November last year this occurred only once in the May quarter of 2005.

This data is consistent with the National Australia Bank (NAB) business survey results that show low levels of exporter confidence and with some of the industry liaison work conducted by the Reserve Bank of Australia (RBA) and Austrade.

Should we be surprised? Not really given the recent revisions in forecasts from private sector economists and officials from the IMF and the OECD. The IMF described the world economy as now entering “a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s”.

The IMF has predicted severe implications for trade too with a -2.8% contraction in world trade volumes in 2009 but with a partial bounce back of 3.2% in 2010.

The OECD has also revised its forecasts too, but at a Sydney University event recently, at which I presented with OECD deputy secretary-general Art de Geus, the OECD praised the fiscal stimulus injected by Australia in response to the crisis, the swift action taken by RBA Governor Glenn Stevens, and the strong stance taken by Trade Minister Simon Crean against a return to protectionism worldwide.

Trade has also caught the attention of Martin Place. In the RBA’s February statement on monetary policy, the bank pointed out not only the weaknesses of the G3 economies – US, EU and Japan – but also the marked fall in output in the emerging economies, particularly in East Asia “through the trade channel.” And the particularly sharp falls in exports from Singapore, Taiwan, Korea and even China.

Following a period where the world economy’s position was almost “as good as it gets”, the RBA expects that “almost all of Australia’s major trading partners are expected to experience growth rates of two percentage points or more below trends rates in 2009, and this would represent “the most synchronised downturn in Australia’s trading partners since the 1970s”.

However, despite these worrying trends, there are some important observations to make about exporters and the global financial crisis.

First of all, according to the Austrade/Sensis research, the proportion of SMEs exporting has held up despite global events and this fits in the overall pattern that exporters stay in the game even when things get rough.

The experience of the Asian financial crisis was that exporters who stuck in Asia “through thick and through thin” succeeded when the economy recovered. And given that crisis was relatively short lived – a “V” shaped recovery rather than a “U” shape – the wiser heads who remained ended up succeeding.

Most successful exporters see going global as a long term game and part of their core business. They see relationships as a crucial ingredient for success, as no one likes a carpet bagger.

Secondly, the data shows that while things are slower for SMEs in mature economies like New Zealand, US and Britain, they are holding up in emerging economies like China and India. The relative stability of the numbers is reassuring too (as SMEs are less directly affected by large swings in commodity prices).

Thirdly, exporters, on average, become better businesses with experience. Austrade research shows that exporters on average pay higher wages, provide better job security, and are more profitable and productive, than non-exporters (and better at all these things after the same business became more experienced at exporting).

But they need help. After all, the same group of businesses who took Australia from a closed, protectionist economy to an open one over the past quarter of a century are in transition (as their baby boomer owners retire) and we’ll be looking for newer generations to help us through the global financial crisis.

Fourth, the lower exchange rate is helping exporters withstand the fall in commodity prices and demand. That’s the beauty of a floating exchange rate – one price adjusts instead of the whole economy – and the dollar acts as a shock absorber for the Australian economy.

One caveat, of course, is that 45% of exporters also import so the exchange rate can affect adversely input costs as well.

Fifth, the current policy settings are helping so far. In past economic crises, such as in the 1930s in Australia, governments would cut spending, cut nominal wages and put up tariffs. And we know what happened.

Fiscal policy put a further drag on local demand, wages fell and consumption followed, and the world got involved in a protectionist trade war. Fortunately, today’s governments are wiser from experience and Australia’s now doing the right thing; offering fiscal stimulus, an expansionary monetary policy, making sure wages grow in line with productivity, and calling for a resumption of the Doha round using trade as a progressive force for global recovery.

One of the most important things we know from the empirical literature, which also shows up in the Sensis data, is that exporters stick at it through thick and through thin. The exporter proportions are relatively stable – and thanks to the economic reforms of the 1980s and 1990s – Australia has built up a higher “natural rate of exporting”.

Overall exporters do things well – and their businesses are built for the long term. Many of our best exporting businesses know that the best way to survive the crisis is to prepare for the recovery.

Thanks to Ric Deverell and Christena Singh for their comments and assistance with this article.

Tim Harcourt is chief economist of the Australian Trade Commission and author of The Airport Economist: www.theairporteconomist.com