Sunday, November 30, 2008

Two more excellent quotes from Tim Colebatch

"Treasury's latest forecast, released on November 5, implied that the worst financial meltdown since the Great Depression will do no more damage to Australia than the introduction of the GST. Sure, guys, whatever you say."

"It's the job of central banks to keep economies growing and on track. It's the job of commentators to tell the truth, to give readers information that is accurate, timely and relevant."


It's here.

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COLEBATCH: Don't believe anyone who won't tell you we're falling into recession

"The reality is that these forecasts are political. They are designed to buy time, offer reassurance, not to give useful information"

"THE OECD forecast that Australia's economy would experience modest but continued growth. Treasury agreed: there will be no recession, it said. And private forecasters agreed: the economy would slow but it wouldn't stop. The time was 1990.

In fact, Australia was already in recession. Yet the authorities told us we would escape it.


It is a bit of history we should keep in mind right now. Treasury, the Reserve Bank, the IMF, the OECD and most private forecasters are unanimous: Australia is in for rough times in the next year or two, but not a recession.

But then, they were almost unanimous in saying the same in 1990 — as Australia slid into a recession that left us with 11 per cent unemployment.

Why? In part, because even when forecasters know in their bones that a recession is coming, they don't want to be the one who delivers the bad news."...

Read Tim Colebatch's full article in the Saturday Age here.

Today,  as if to demonstrate that Tim is right, each of the forecasters is predicting positive growth in the September quarter figures to be released Wednesday.

A bit odd don't you think, that none say they are predicting a negative number even though three come close to it and one almost hits it.  I mean, how much closer to negative can you get than 0.0%?


The forecasts are below the fold:

Economists' GDP growth forecasts for the September quarter:

4Cast: 0.1

AAP: 0.2

ANZ: 0.2

Citigroup: 0.1

Commonwealth Bank: 0.3

HSBC: 0.2

ICAP: 0.2

JPMorgan: 0.4

Macquarie Group: 0.4

Moody's: 0.3

NAB: 0.2

RBC Capital: 0.2

TD Securities: 0.0

UBS: 0.3

Westpac: 0.1

Median Forecast: 0.2

Source: AAP

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Saturday, November 29, 2008

TAXING TIMES: Could Ken Henry be thinking really big?

It's crunch time at the Henry Tax Review.

The Prime Minister's hand-picked five-person team is in the final stages of preparing the consultation paper it will release in December setting out the lines of thought that have emerged from the hundreds of submissions it has received and consultations it has held since August.


After that it'll spend an entire year honing down those lines of thought, expanding those that will work work and discarding that that will not until it reports in December 2009.

The good news is that many of the ideas that will work are actually quite simple. The inquiry's Chair, Treasury Secretary Ken Henry scared us a bit earlier this month when he talked about the myriad ways in which Australia taxes fencing wire and our 125 different taxes - "more than there are northern hairy nosed wombats".

These good ideas may be simple, but they are also disturbingly big.

None bigger than destroying one of Labor's most important tax measures in order to axe the company tax rate.

Dividend imputation was pushed through the Labor caucus only by the force of the Treasurer Paul Keating more than 20 years ago. He sold the change by asking it to imagine two small shopkeepers - perhaps an Italian or Pakistani couple in a working class area, according to a recent biography. If the shopkeepers formed a company their profits would be taxed twice - once at the company tax rate and then again at the full personal tax rate when they was distributed as dividends...

"If that fair?" Keating is said to have asked, and then told caucus that if double taxation wasn't fair for small shopkeepers it wasn't fair for anyone.

So from 1987 almost alone in the world, Australia taxed the corporate profits received by Australians only once. If a company had already paid tax on the profits it was distributing, its Australian shareholders (but not its foreign ones) could get a credit to set against their income tax.

Much of the rest of the world followed Australia. The UK already had such a system, but has since abolished it as has Ireland. They found it complicated and not particularly appreciated.

Appreciation matters. Nick Gruen of Lateral Economics points to a study that finds Keating's gift to be so little appreciated by Australian shareholders that it is "unable to reject the hypothesis that companies with dividend imputation do not attract any share price premium".

Many companies simply don't bother. They'd rather minimize their tax, and they know that Australians are about as likely to invest in them without dividend imputation as with.

The shareholders they need to impress are the ones from overseas - the so-called "swing" shareholders with investments in every country in the world to choose between who can really move a share price. Yet they are excluded from dividend imputation.

What they get instead is a 30 per cent headline corporate tax rate. About standard or not, it looks unattractive compared to other countries' headline tax rates.

Our system of imputation prevents them from getting a tax cut - a massive cut that would bring the corporate tax rate down to 19 per cent.

That's what Dr Gruen reckons would be possible if dividend imputation was axed. It costs more than $20 billion a year.

And he says the cut in the company tax rate could be even bigger. If cutting the rate brings in more foreign investors as it is likely to, it'll make it cheaper for Australian firms to raise money, boosting their profits and possibly funding further cuts in the headline rate.

All this without costing the Treasury a thing.

Who's going to mind? Well the Australian shareholders enjoying imputation credits are likely to be upset. But less so if Doctor Gruen explains his thinking to them. He believes the tax cut would lift foreign direct investment in Australian companies by almost one-quarter. That's right, almost one-quarter. Its the sort of thing that happened when Ireland and Britain abolished their imputation schemes to fund corporate tax cuts. Ireland in particular was flooded with foreign capital.

What would this do to Australian share prices? Nick Gruen believes it'll push them high enough to compensate the Australians investors who will miss out on their imputation credits. They'll get higher share prices instead. And back a decade ago Australia halved its rate of capital gains tax, didn't it?

Well actually, it didn't. Australia halved only the headline rate of capital gains tax and recouped much of the loss by removing the inflation discount. But it was the headline rate that mattered. All manner of Australians began gearing up to invest. Which is partly Dr Gruen's point. Headline rates matter. Australia is denying itself a 19 per cent corporate tax rate and the flood of money it might bring for no particularly good reason.

It's also denying itself a much simpler tax system.

Gruen has persuaded the Committee for the Economic Development of Australia of the merits of the change and also the government's Innovation Review of which he was a member.

It found that switching from dividend imputation to a lower tax rate looked "extremely promising from the perspective of promoting entrepreneurialism, productivity, investment and economic growth".

It reported that the equity issues were "surprisingly mild for such a large change."

Who's left to object such an apparently good and simple idea? Two of the members of the Henry Review, Dr Ken Henry and Professor Greg Smith helped introduce dividend imputation while working on tax at the Treasury in the mid 1980's. But that's unlikely to matter much. If they were bright enough to recognise a good idea two decades ago, they'll be bright enough to assess whether there's a better one now.

The Tax Office likes dividend imputation as an "integrity measure". It keeps (some) companies honest in reporting profits. But many more don't bother with imputation.

And managed trusts. Many owe their livelihoods to offering mum and dad investors dividend imputation and its benefits. They began fighting such a change the day Ken Henry was asked to chair the Review.

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Could house prices actually be climbing?

About that debate between Rory Robertson and Steve Keen, the audio is here. HT: Keen

Meantime:


Widespread claims that house prices are falling seem to fly in the face of statistical evidence, with Australia's most accurate price index showing gains in each of the last two months and Melbourne prices climbing the fastest in eastern Australia.

The RP Data-Rismark Hedonic Property Value Index measures changes in the prices of houses that are actually similar. Other indexes lump sales together, meaning that if more expensive houses are sold in one month than another overall prices appear to rise or fall even though the price of each house may not have changed.

By comparing, for example, the price of an unextended 3-bedroom house in Glenroy only with earlier sales of unextended 3-bedroom houses in Glenroy the index is designed to give a truer picture than those produced by the Bureau of Statistics and real estate organisations.

The index suggests that like-on-like prices climbed 0.2 per cent in September and a further 0.4 per cent in October. Melbourne prices slipped 0.3 per cent in September before jumping 1.4 per cent in October, a performance better than that of any other eastern states capital...

RP Data's head of research Tim Lawless said he believed "doom and gloom merchants" had misunderstood the property market.

“It appears Australian property values have proven to be remarkably resilient despite multiple interest rate hikes in early 2008 and the effects of the credit
crisis,” he said.

The improvements are in line with figures released by the mortgage broker AFG which says its October home loan volumes were the strongest since November 2007, climbing by 18 percent in one month.

Most of the price increases in Melbourne took place in the price of houses. The price of units grew more slowly.

Perth and Sydney prices are down 5 per cent and 3 per cent so far this year with prices in Adelaide and Darwin soaring 7 per cent and 9 per cent. Melbourne prices climbed 1 per cent.

Reserve Bank credit figures show borrowing for housing continuing to climb, although borrowing for investor housing is growing more slowly than at any time since records were first kept 17 years ago.

Borrowing for owner-occupied housing grew by 9.2 per cent in the year to October, its slowest growth rate in 9 years.

Personal borrowing slipped another 1 per cent in October, its fifth consecutive monthly decline.

"It looks as if consumers are cutting back on borrowing in an attempt to minimise debt," said Commonwealth Securities economist Savanth Sebastian.

"Borrowing for things other than houses is contracting as consumers deleverage the balance sheets in response to economic slowdown and a credit squeeze, said TD Securities economist Joshua Williamson.

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Friday, November 28, 2008

What's our form with recessions?

Craig James at CommSec:

"The last recession in Australia was over 17 years ago. The economy contracted over the June and September quarters of 1990, was flat in the December quarter, and then fell over the March and June quarters of 1991. Recovery was patchy for another year before the economy hit its straps in late 1992.

Overall there have been seven ‘technical’ recessions in Australia (two consecutive quarters of contraction) since 1959. Other recessions were June – September 1961, December 1965 – March 1966, December 1971 – March 1972, September – December 1975, September – December 1977 and September 1982 – June 1983.

Interestingly some of these supposed “recessions” didn’t exist at the time – they have appeared through the revision of statistics over time. The years generally regarded as recessionary periods were
1975, 1983 and 1991.

The last major slowdown in Australia occurred in 2000/01. And while the bursting of the technology bubble caused a recession in the US, the main influence on Australia was the introduction of the GST. The introduction of the consumption tax caused a number of timing issues, especially the bringing forward of house purchases and construction, causing a slump after the tax was introduced in July 2000.

The economy did contract by 0.8 per cent in December quarter 2000 but then rebounded smartly. In fact over the past 17 years there have been three occasions where the economy contracted and then subsequently rebounded – so the situations are rare but not unheard of."

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One reason we're headed for a budget deficit

THE Prime Minister has stepped up his defence of a budget deficit as new figures suggest that Victoria is holding back the national economy.

The quarterly measure of business capital expenditure produced as an input into the calculation of Australia's Gross Domestic Product shows that Victoria held back the nation more than any other state.

Capital expenditure collapsed by 9 per cent in Victoria in the September Quarter, almost twice as much as it did in NSW. In every other state apart from Tasmania capital spending increased.

So big was Victoria's $391 million collapse that it half offset Western Australia's jump of $609 million.

Nationwide, capital investment increased a seasonally adjusted 0.6 per cent. Without the collapse in Victoria it would have jumped 2.2 per cent...

Victoria’s share of manufacturing investment stands at its lowest level on record.

Prime Minister Kevin Rudd used the gloomy figures in parliament to defend his embrace of a budget deficit, challenging the Opposition to openly oppose the measures that could bring it about.

"Those opposite need to answer these questions: Do they support the economic security strategy? Their formal position is yes, I believe. Does anyone oppose the economic security strategy over there? Does anyone oppose the car plan over there?" he asked.

"The government is prepared to take whatever further action is necessary to support growth, to support jobs, to support families. The question the house would like an answer to is, what is the alternative strategy?"

Declaring that the year ahead was going to be "very tough indeed" Mr Rudd said that his government stood ready to take decisive action if the global economic crisis got worse. By ruling out a budget deficit the Coalition appeared to oppose to such action.

Challenged about his election campaign claim that he was an economic conservative who believed in budget surpluses Mr Rudd referred to "the conservative government of Germany, the conservative government of Japan and the conservative govt of the United States who are running fiscal deficits of minus 4.6 per cent of GDP, minus 3.8 per cent of GDP, and Germany on the back of its most recent stiumuls package 0.8 per cent of GDP".

Rather than engage in a debate about solutions the Opposition was trying to point-score out of other people's pain.

Shadow Treasurer Julie Bishop said the Prime Minister was panicking and should hold his nerve and focus on Australia's strong underlying fundamentals.

In another development Assistant Treasurer Chris Bowen appeared to open the possibility of cutting the rate of the goods and services tax before issuing a qualifying statement saying that it was not an option.

"We are not in the business of ruling things in or out because we need to keep our budgetary options open,'' he told Fairfax radio. "But of course in Australia, as opposed to other countries, there's a different set of arrangements in place for the GST where the states would have to agree to it.''

He later issued a clarifying statement, declaring that "the government has a firm commitment that it will not be changing the base rate of the GST"

"That commitment will not be changing,'' it said.

Click to Read More...

Thursday, November 27, 2008

Rory Robertson vs Steve Keen

Who's going to climb Kosciusko?

Macquarie's Rory Robertson writes:

"I was in Canberra yesterday, presenting at the Federal Treasury and the Parliamentary Library. Over the past year, I've often been the most pessimistic person in the room. My second presentation yesterday, however, followed one by Dr Steve Keen (google, if you are keen), whose high-profile forecast of a 40% drop in Australian home prices has put the wind up many homebuyers and potential home-buyers, not to mention some offshore investors.

Never say never, but a 40% drop in Australian home prices is a highly unlikely event, effectively requiring a meltdown of our financial system despite the combined efforts of the RBA and Canberra. Happily, Australia is not the United States. US home prices are down by about 20% from their mid-2006 peak, while our home prices fell by 2% in Q3, driven by the 150bp increase in mortgage rates overseen by the RBA between July 2007 and July 2008 (now more than fully reversed).

To make it interesting, I offered Dr Keen a challenge...

On the maybe 1% chance that he is right, and capital-city home prices do indeed fall by 40% within the next five years - starting from Q2 2008, and as measured by the ABS - I will walk from Canberra to the top of Mt Kosciusko (that's maybe 200km followed by a 2228-metre incline).

If Dr Keen turns out to be less than half right, as I expect, and home prices drop by (much) less than 20%, he will take that long walk. Moreover, the loser must wear a tee-shirt saying: "I was hopelessly wrong on home prices! Ask me how."

We now have a bet, and I expect to record an easy win within two years. That's because falls in Australia-wide home prices will be limited by our lack of overbuilding, our much more disciplined mortgage market, and - especially - by the RBA's ability to drive mortgage rates lower (something the Fed until this week had been unable to do; see latter part of chartset, attached).

Critically, the RBA knows that it was 15-20%-plus drops in home prices that poisoned the US and UK banking systems and economies. And so that must not happen here; accordingly, limiting the drop in average home prices is an unstated but obvious objective of increasingly easy RBA policy.

I'm still guessing that the RBA will cut by another 100bp next Tuesday, to 4.25%. A 100bp cut is more likely than a 75bp cut is more likely than a 50bp cut, I'm thinking without overwhelming confidence (given that most of us were badly wrong-footed three weeks ago).

To me, there would be a neat symmetry in reversing six years of monetary tightening - from 4.25% to 7.25% - in just four meetings over just three months, in response to the sharpest deterioration in global growth prospects in decades. Moreover, with global equity and commodity markets having rebounded nicely from last week's disturbing new lows, a 100bp RBA cut delivering a standard mortgage rate of 7% or less might allow everyone to go into the pre-Christmas season with freshly elevated hopes that everything ultimately will turn out okay.

Assuming that Dr Keen eventually will have to take that long walk, it will be because he greatly under-rated the quality of macroeconomic analysis undertaken at the RBA and in Canberra, and underestimated the power of low interest rates to support local home prices even in the face of today's alarmingly weaker global backdrop."

RORY'S UPDATE Friday November 28:

"Hi there. Sorry to interrupt. For the record, Steve Keen is keen to clarify that our bet is "peak to trough", as agreed, with no five-year limit . Obviously, I expect this distinction will not make a difference, with the ABS house price index likely to surpass its Q2 2008 level well within 5 years.

Anyway, all good fun, and thanks for all the feedback. Thanks especially to those who've offered to join me on the walk to Mt Kosciusko - one even to cook each evening! - but cool your jets. I'm not expecting ever to have to take that walk!"  

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Who ran up and who paid off debt

Commenter Marek asked whether Julie Bishop could possibly be right when she said that it took the Coalition ten years to pay off $96 billion of debt left by Labor.

The figures are here, and below - click to enlarge.

Julie Bishop is right. The Coalition paid off Labor's debt. It did it by selling just about everything it could lay its hands on apart from Australia Post.

Telstra accounted for the bulk of it (although the government got a bad price for the first lot of Telstra).

Selling Telstra meant that the government missed out on its dividends. It helped government finances not at all.

It was as if a farm sold it cows to pay off its debt. It would become debt-free, but would miss out on milk and the earnings from selling it.


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Who's run a surplus and who's run a deficit?

Commentator "anonymous" asked, and the answer is here.

Or you click on this table and it should enlarge:


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It's that 'D' word - the taboo's been broken

PRIME Minister Kevin Rudd has broken the taboo on countenancing a budget deficit, declaring that if if Australia's economic outlook worsens further he will run up a "temporary deficit" in order to prevent an explosion in unemployment.

Telling Parliament there was "no point in sugar coating," Mr Rudd said that if the government had been unable to introduce its present $10.4 billion economic stimulus package , "the consequences for jobs would be devastating".

If global conditions worsened, Australia's economy would weaken and its already-weak government revenues would shrink further, "as surely as night follows day".

"Under those circumstances it would be responsible to draw further from the surplus and, if necessary, to use a temporary deficit to begin investing in our future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband."

"Such action would support growth, families and jobs and would be undertaken in the national interest. In fact failing to do so would be irresponsible – and would sacrifice growth and jobs," he said.

Its the first time the Prime Minister has conceded the budget may go into the red, and one of the first times he has uttered the word as Prime Minister. Until now both Mr Rudd and the Treasurer Wayne Swan have contorted language in order to avoid using the word. In Peru Mr Rudd answered questions about a deficit by referring instead to "borrowing" and in a television interview on line from the US Mr Swan referred instead to "the area that you are speculating about"...

The $22 billion surplus forecast in the May budget was halved in October by the government's $10.4 billion economic stimulus package and then halved again by updated forecasts in this month's mid-year budget review.

Mr Rudd told parliament yesterday that he would introduce another stimulus package if needed "going hard, going households, going early," and that his actions would be "consistent with the discipline of maintaining a surplus across the economic cycle."

While there was no need for a deficit "at present," every other industrialised economy apart from Canada was in deficit.

Across the OECD eight million people stood to lose their jobs.

"The strategy that is available to any government is to stand back and let it all happen; let the damage be inflicted upon households, families, individuals trying to hold onto a job or to get their first job, or to do something about it," Mr Rudd said.

The Opposition Leader Malcolm Turnbull said the Prime Minister was preparing Australians for a string of unending labor deficits.

"The last Labor deficit lasted for 6 years. It wasn't temporary, it went on for 6 long years," he said. "We are not going to see a temporary deficit, but one that goes on for as long as we have the Rudd government leading this country."

Access Economics director Chris Richardson welcomed Mr Rudd's new approach saying that as long as any deficit was "truly temporary and targeted" it would pass the economic test and should pass the political test.

Skilled vacancy figures released yesterday provided a further indication that unemployment is about to rise. The Department of Employment said skilled vacancies fell 5 per cent in November to be down 29 per cent over the year.

In contrast construction activity continued to climb in the September quarter, rising 4.4 per cent, far outpacing expectations of a 1.5 per cent increase.

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Wednesday, November 26, 2008

The November budget update "probably" already out of date

Treasurer Wayne Swan on tonight's 7.30 Report:>

O'BRIEN: So if the rest of the world economy is now getting worse than you anticipated when you produced the mid-year review, won't some of your assumptions in that mid-year review be out of date too - like growth? Three weeks ago you expected growth in Australia to slow from 2.5 per cent down to 2 per cent in this financial year. Surely growth will now be slower than that too won't it? Has to be.

SWAN: Well it most probably will. We said when we produced the mid-year economic review that all the risk was on the downside, and events since then confirm that that is the case.

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Here's the Opposition's line - responsible, measured...

"Today the Prime Minister has announced his intention to plunge Australia’s budget into deficit.

The Prime Minister claimed that this would be a ‘temporary deficit’.

Experience tells us that Labor deficits are never temporary.

We have seen what happens when Labor governments drive budgets into deficit.

Like a drug, Labor is addicted debt.

The last ‘temporary’ Labor deficit ran for 6 years until the defeat of the Keating Government in 1996.

Labor’s definition of a temporary deficit is what Australia has to have until a Coalition government makes the tough decisions required to repair the economic damage.

It took the Coalition ten years to pay off the $96 billion debt left by Labor’s last ‘temporary’ deficit.

Australian taxpayers paid an interest bill of $8.5 billion a year on that ‘temporary’ deficit.

On the current growth forecasts there is no reason for the Prime Minister to send Australia’s budget into deficit.

On the Government’s own figures growth next year will be 2%.

12 months ago the Rudd Government inherited a $20 billion surplus.

Today the spectre of deficit looms."

Julie Bishop MP

Deputy Leader of the Opposition

Shadow Treasurer



Oh my.

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Rudd's done it!

The 'D' word.

"KEVIN Rudd has conceded for the first time that Australia's budget may have to go into "temporary deficit" if the global financial crisis worsens.

And the Prime Minister warned any failure to do so would be irresponsible, putting jobs at risk.

It's the first time the Prime Minister has finally admitted the budget may go into the red after weeks of word games over the state of the increasingly wafer-thin surplus."


JUST IN: Rudd's words:

"If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that the Australian Government revenues will reduce further.

Under those circumstances, it would be responsible to draw further from the surplus and, if necessary, to use a temporary deficit to begin investing in our future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband.

Mr Speaker, under those circumstances, such action would support growth, would families and jobs and would be undertaken in the national interest. In fact Mr Speaker, failing to do so would be irresponsible – and would sacrifice growth and jobs. But any such action would need to be temporary, consistent with the discipline of maintaining a surplus across the economic cycle.

These circumstances do not prevail in Australia at present. Our current circumstances do not require us to embrace such a course of action. And the Government will do everything possible to swim against the global tide to support both growth and the surplus – but this is becoming tougher and tougher."


Turnbull's response was unfortunate... along the lines of there being no such thing as a temporary Labor surplus.

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The OECD thinks we'll muddle through

Or that's what it says, anyway

AUSTRALIA'S unemployment rate will soar from 4.3 per cent to 6 per cent with the budget maintaining a threadbare surplus under updated forecasts released by the Organisation for Economic Co-operation and Development.

The forecasts released in Paris overnight appear more negative than those of the Australian Treasury but accord with its thinking, being expressed in calendar-year rather than financial year terms.

The Treasury is forecasting no further jobs growth this financial year and an unemployment rate of 5.75 per cent by mid 2010. The OECD is forecasting 6 per cent by December 2010, indicating that expects jobs growth to remain weak.

Both are more optimistic than private forecasters including Goldman Sachs JBWere which are predicting an unemployment rate as high as 7.5 per cent by the end of next year...

The OECD warns that a more pessimistic scenario for Australia "cannot be ruled out."

"An external environment that is less favourable than expected combined with a further decline in the terms of trade would pose significant risks," it says. "Especially if the global financial crisis continues and brings about a greater weakening of the Chinese economy."

The OECD is expecting China's economic growth rate to dip from 9.5 per cent this year to 8 per cent next year after having slipped from double digit growth this year for the first time in five years.

It is forecasting extended recessions in the United States, Japan and Europe with the US not recovering until the second half of 2009.

The OECD expects Australia's budget surplus to tumble to just 0.6 per cent of GDP in 2009 before sliding to 0.3 per cent in 2010.

Its views are often seen as representing those of the Australian Treasury which employs a representative to work as a member of the OECD staff.

It expects Australia's rate of inflation to slide to halve in the next two years, sliding to 2.4 per cent by the end of 2010.

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Tuesday, November 25, 2008

The UK just HAS cut its GST

Details here.  Stephen Koukoulas thinks we could too

"VALUE Added Tax (VAT) has been cut from 17.5 per cent to 15 per cent as part of the £20 billion "fiscal stimulus" package to encourage spending and spur economic growth. The reduced rate will operate from Monday for 13 months...

INCOME tax on the highest-earners – those who make at least £150,000 a year – will be raised to 45 per cent. The new tax band will come in from April 2011. By announcing a deferred tax rise, the Chancellor is attempting to outline how he will make up the borrowing he is doing now."

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What is the difference between a recession and a depression?

Saul Eslake at Club Troppo:

"One day last week I came into the office to find an email from my boss time-stamped 2:46am (and no, he wasn’t in another time-zone) asking ‘what, technically, is a depression’. What follows is a slightly expanded version of my answer.

There is a very old joke which says “a recession is when your neighbour loses his job, a depression is when you lose yours” . This plays to the widely accepted contemporary belief that a depression is simply a particularly severe recession. A quick trawl through cyberspace (which can be done readily by googling ‘difference between recession and depression’) throws up two criteria for distinguishing a ‘depression’ from a ‘recession’ – a ‘depression’ is either a decline in real GDP of more than 10%, or a contraction in real GDP which lasts more than three, or four, years."


The full thing's here.

And here is the Great Depression explained.  The entire encylopedia is good too.

And Wikipedia's account of The Global financial crisis of 2008

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They're preparing us for a deficit

THE Prime Minister has opened up the possibility of the budget going into the red - saying that if there is a budget deficit, the shortfall is likely to be met from government investment funds such as the $20 billion Building Australia Fund rather than by borrowing.

Under questioning at the conclusion of the APEC summit in Peru Mr Rudd repeatedly refused to rule out a deficit, saying only that the government expected to get by without having to borrow.

"What I am saying is, under current circumstances, we do not see the need to borrow for the purposes of Government spending and investment," he said.

When asked whether he was drawing a distinction between a budget deficit funded by borrowing, and one funded from the reserves of funds such including the Building Australia Fund and the $11 billion Education Investment Fund Mr Rudd said that the purpose of the funds was clear cut and that "each year as you draw down on the funds, of course it goes to the budget bottom line, that is clear."...

"We have known that and we have said that all the way through," Mr Rudd said. "What I am talking about is borrowing for the purposes of Government investment or spending and what I am saying to you loud and clear is that based on current circumstances, we do not see the need to borrow."

The distinction opens the way for this year's forecast deficit of $5.4 billion to turn into a deficit funded by some of the $30 billion the government salted away in infrastructure investment funds in the May budget.

The government would be able to argue that although the budget had fallen into deficit, it did not need to borrow in order to fund it.

The new line of argument came as APEC leaders spoke of a need further co-ordinated action in the new year to avert global recession.

"There was the beginning of an understanding of the added benefit that comes from co-ordinated action based on advice from the International Monetary Fund that if you act together it has a double stimulatory effect," Mr Rudd said.

The Prime Minister distanced himself from a forecast in the communique that the economic crisis could be over within 18 months.

"I think that statement was from the Peruvian President," he said. "We all know for a fact that the recovery from the global financial crisis and the global economic crisis is going to take a period of time."

Overnight the IMF warned that that it expected the crisis to continue into 2010. "This will dampen economic prospects via a number of potential channels, notably lower demand for Asia’s exports, tighter funding conditions, more volatile capital flows, depressed equity prices and confidence," it said it its Asia-Pacific Economic Outlook.

It forecast economic growth of just 0.8 per cent this year, and a mere 0.1 per cent next year in what it called "industrialised Asia," made up of Japan, Australia and New Zealand.

It expects Australia's growth rate to slide from 2.4 per cent this year to 1.8 per cent in 2009.

Merrill Lynch joined Goldman Sachs JB Were and JP Morgan Monday in forecasting an Australian recession beginning in the last half of 2008. All three expect the budget to fall into deficit.

Speaking at the National Press Club Opposition Leader Malcolm Turnbull declined to offer support for a deficit. "You’re wanting me to give Kevin Rudd a leave pass to have lazy economic management and run the budget into deficit?" he asked. "If that's the invitation, I decline it. Mr Rudd has inherited public finances which are the envy of the world. There is no reason why he should not be able to maintain a surplus."

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Our emissions trading scheme will make saving energy "pointless"

An independent think tank has issued an eleventh hour call for the Rudd government to modify the details of its planned carbon pollution reduction scheme, saying it will render attempts by ordinary households to cut pollution "pointless".

In a report issued this morning entitled "Fixing the Floor" the Australia Institute argues that the carbon pollution cap due to be announced shortly will in effect also be a "carbon pollution floor".

"When emissions trading comes in, every tonne of carbon dioxide saved by households will simply free up a tonne that can be used by industry," said the Institute's executive director Dr Richard Denniss.

"Installing solar hot water systems, driving smaller cars and turning off the light's will not help the environment one bit."...

The institute is proposing a modification to the scheme put forward in the so-called green paper that would allow household energy reductions to cut the total number of pollution permits in circulation.

In a separate development the Climate Institute today takes the unusual step of taking out newspaper advertisements calling on business leaders to speak out about targets in the lead-up to the government's decision.

“To their credit, most business leaders now accept the science of climate change," said the Institute's John Connor. "But remaining silent on the objectives we now need to set ourselves is a ‘greenwash’ of epic and global proportions."

“It is time business leaders came clean on their 2020 and long term objectives for ensuring a safe climate for future generations," said Mr Connor.

REACTION: Joshua Gans writes: Is the Australia Institute off the planet?

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Monday, November 24, 2008

Why not simply cut the GST?

It's an idea that's occurred to Stephen Koukoulas of TD Securities:

"One very simply plan, which would not have a lasting impact on the Budget balance would be a 12 month cut in the GST to say 8%, perhaps lower. This injects money into the economy immediately, it is fairer in that is does not simply benefit borrowers; if implemented with a 12 month sunset clause, future budget balances would not be impacted and it could dampen inflation expectations. (There are issues of State financing, an effect on bringing forward spending with a hangover after that and the like, but these are small beer when policy makers are doing as much as possible to inspire economic growth.)"

Koukoulas continues...

"Howard and Costello’s Policy Failure

The current economy circumstances bring into focus the inept, short-sighted and hopelessly misguided handling of the economy in the final years of Howard and Costello government. In the period from about 2003 – 2004, Howard and Costello were continually surprised by the size of the budget surplus as the economy boomed on the back of a once in a century surge in national income from the staggering strength in commodity prices and remarkable growth in Australia’s major trading partners.

Instead of saving for a rainy day or building war chest of money for when this bubble burst (insert your own cliché!), they spent the windfall fiscal gains like drunken sailors, which fuelled a surge in inflation, which in turn caused the RBA to hike rates aggressively, which in turn is one reason why Australia is so vulnerable now to the global slow down. Right now, the near certain collapse of the terms of trade and the risk of a deep recession are not helped by this past profligacy.

These may be moot points at the moment, but there is a lesson for the Rudd and Swan government.

Had Howard and Costello managed the economy well and accumulated much of the windfall gain in large Budget surpluses in the period 2004 to 2007, inflation pressures would not have been as intense, the RBA would not have hiked as dramatically as the government would have somewhere between $50 billion and $75 billion is spare cash to support the economy at its time of need. Simply put, the government would now have greater flexibility to cut taxes and increase spending when the economy is cascading towards recession.

Rudd and Swan – Don’t Make the Same Mistake!

In this context, it is important for the current Rudd government to jettison the idea that the Budget must stay in surplus – even in a recession. As mentioned, the case for a substantial fiscal easing is strong, even if that means the Budget falls into deficit by 2 or even 3% of GDP.

It would be dumb to try to keep the Budget in surplus at a time of weak growth and rising unemployment. Postponing tax cuts and cutting spending in these circumstances is as foolhardy as the policy platform of Howard and Costello in their last few years in government, but in the opposite direction.

If indeed, the economy is as bad as it looks, embrace a Budget deficit, spend up to limit the inevitable human misery that a recession inevitably brings and manage fiscal policy in a counter cyclical way.

If this succeeds, of course this is great news. Just be aware that whenever the recovery comes, be prepared to slash spending, hike taxes to return the budget to surplus, but do it only when the economy is strong enough to stand it."  



Responses:

Nick Gruen writes:

Well, I'll be pleased if I'm wrong, but it seems barmy to me. Hard to see how you couldn't have stimulated consumption by foregoing a lot less revenue than that. A 1.5% cut in prices (some of which won't flow through from the menu costs one presumes.)

The economic textbook is a good thing, but not when used in such a mechanical way. Still, I guess we'll find a little bit out about how it turns out.


Crikey wrote:

Last night, ABC viewers were treated to the spectacle of Peter Costello banging on about "his" GST on the steadily more dreary Howard Years . A few hours later, Fairfax's Peter Martin quoted economist Stephen Kokoulas as advocating a cut in Costello's GST from 10% to 8%. Around the same time, the UK Government &resolved to temporarily slash its rate of VAT from 17.5% to 15% in a bid to stimulate its tanking economy. Could the Rudd Government be contemplating a similar move?Publish Post

The Kokoulas plan: "One very simple plan, which would not have a lasting impact on the Budget balance would be a 12 month cut in the GST to say 8%, perhaps lower. This injects money into the economy immediately, it is fairer in that is does not simply benefit borrowers; if implemented with a 12 month sunset clause, future budget balances would not be impacted and it could dampen inflation expectations. (There are issues of State financing, an effect on bringing forward spending with a hangover after that and the like, but these are small beer when policy makers are doing as much as possible to inspire economic growth.)"

Crikey asked a group of leading Australian economists if a cut in GST could be feasible:

Shane Oliver, AMP Capital Investors: It's quite a smart move actually and it's certainly possible. But there's an upside and a downside. The upside is that if you give a regular tax cut to people they may not spend it -- they may chose to save it or pay off their mortgage. The benefit of cutting the GST is that people only get the tax cut if they spend money. So it's certain to provide some form of stimulus. The downside is that it will result in more administrative complexity for business if you're changing the rate all the time. But overall, it's not inflationary and it makes sense and it's a smart way of ensuring an increase in spending.

Adam Carr, Senior Economist, ICAP Australia: It would definitely provide a stimulus for the economy but the main problem is I just don't think there'd be the political will. Governments around the world are certainly willing to try different things to kickstart the economy but locally you'd get the state governments, like NSW, kicking up a huge stink in relation to GST revenue. But yes, it would certainly make good economic sense.

Josh Williamson, TD Securities: I think this could arise as a policy option if we find ourselves in a deep recession in '09 or '10. The basic premise is that a cut in GST, if properly monitored by the ACCC, would result in downward pressure on prices and perhaps help revive growth rates. I think it's politically feasible and would prove popular with consumers, although the government would have to make a decision on how to make up losses on GST revenue, especially to compensate the states.

Assoc. Prof. Steve Keen, University of Western Sydney: I'm not particularly fussed. I'd rather see the GST actually increased and used to abolish stamp duty. In terms of a long term performance that's a much better thing to do. At the moment state governments use the GST as a major source of revenue and this encourages property speculation. So I'd rather see GST increased as a long term strategy rather than pursuing short term stimuli of cutting the rate of GST. We're not going to be able to spend our way out of this one. Consumers are massively in debt and they have to massively reduce their debt levels.



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Saturday, November 22, 2008

Business to Governor - thank's for the advice, but...

AUSTRALIAN businesses are flatly rejecting pleas from the Reserve Bank to continue spending in the face of economic downturn, with many saying they'll have to "pull in their horns" to survive.

On Wednesday in Melbourne the Bank's Governor Glenn Stevens pleaded with businesses, markets and commentators to look beyond what he called "the gloomy talk that's around" and focus on the long-term.

But a range of business leaders spoken to by The Age have derided that as bad advice.

"Around 20 per cent of our stores are making no money," said Gerry Harvey, who runs Harvey Norman. "Their sales are down in some cases 20 per cent and their costs are up. They've got to cut 20 per cent off everything; staff, stock, everything. If they do it too late, or if don't do it, or don't listen to us, they'll collapse."

Australia-wide, Harvey Norman's sales are down around 3 per cent, and the weaker dollar means the cost of the goods it imports is climbing. "I'm cutting back on advertising this Christmas. People say I shouldn't, but when margins are down and sales are down, if you keep spending on advertising, you'll go broke"...

Heather Ridout, chief executive of the Australian Industry Group says reality has to trump pleas for confidence.

"Businesses have to respond to realities. Many are not getting orders. They have to pull in their horns and hunker down," she says.

Four in ten businesses surveyed by the Industry Group are winding back their plans. "They've seen their orders fall, a good many are finding it hard to get access to cash. They have got to be much more cautious."

Ms Ridout says caution is also good advice for consumers, including those about to get economic stimulus cheques of $1,000 or more from the federal government.

"Consumers are seeing wealth impacts on their superannuation accounts and on their houses. They've got too much debt, and what they should be doing is deleveraging, not taking on more debt, and sepnding like everyone seems to want them to do. That's not rational," she says.

"Good advice to someone who gets a $1,000 cheque would be to pay off the elecrtricity bill, put a little bit aside just in case."

It's advice counseled against by the Reserve Bank Governor who on Wednesday warned against what he called "the paradox of thrift". He said when faced with a loss of income consumers and businesses naturally wanted 5to cut back their spending and save instead.

"The problem is that, for the economy as a whole, if everyone attempts this change simultaneously the paradox of thrift says that the economy will contract," he declared.

"I agree with what Glenn Stevens is saying, it will become a self-fulfilling prophesy," says Jeremy Johnson, president of the Victorian Employers' Chamber of Commerce and Industry. "But for some of our businesses the money tap has been turned off very quickly."

"Businesses that run on the smell of an oily rag will go under, but others will be able to invest in what they do and emerge stronger."

Heather Ridout said that smart businesses would use the downturn to clean out unneeded staff.

"They are keeping skilled workers and letting go of process workers. One of my members told me that his divisional manager is gone and that he's doing the job himself. He'll come out of this stronger."

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Friday, November 21, 2008

Forget the 'R' word

Our Treasurer can't even say the 'D' word. It's getting tiresome.

Tim Colebatch: Just say it

Michelle Grattan: It's not a dirty word

TREASURER Wayne Swan says he has no plans to borrow in order to invest, despite an assurance from the Reserve Bank that it would be okay to do so.

The Bank's comments came in a speech to a Melbourne business audience Wednesday in which the Governor Glenn Stevens said it would be "potentially destabilising" for governments to pull back from worthwhile investments merely because of concern about their budgets.

Mr Swan said while the Governor's remarks were "balanced," in the current circumstances his government had no need to borrow in order to fund investment.

The May Budget allocated more than $20 billion to new Building Australia Fund to invest in roads, railways, ports and broadband, $11 billion to an Education Investment Fund, and $10 billion to a Health and Hospitals Fund.

Pressed as to whether it was acceptable to go into deficit, the Treasurer said that he would not speculate.

Asked whether it was acceptable to go into deficit in any circumstances..

..he replied that he believed in "surpluses over the cycle".

"We have been absolutely consistent in that. And we don’t believe that in the current circumstances it is necessary to borrow to invest. I simply couldn’t be any clearer than that," the Treasurer said.

The Opposition leader Malcolm Turnbull found himself in apparent agreement, telling journalists in Perth that was "not going to get into a hypothetical" about a deficit.

"What I am saying is that starting where we are today, looking forward to growth next year at 2%, a competent government should be able to manage our economy so that we maintain a surplus and at the same time maintain economic growth."

"I’m not going to give Kevin Rudd a leave pass to spend all of the savings of 11 and a half years of strong Coalition government. If he wants to run up a deficit let him make the case for it. Let him make the case for blowing away the savings of 11 and a half years of competent management."

Asked five questions about a deficit at his Canberra press conference the Treasurer declined to once use the word.

"There are underlying strengths in the Australian economy, but of course great impacts from the global financial crisis. As we watch what’s going on around the world it gets tougher and tougher, no doubt about that," Mr Swan said.

The May Budget surplus forecast of $22 billion has been whittled down to $5.4 billion as a result of the government's economic stimulus program and deteriorating tax revenues.

In another development the Reserve Bank revealed yesterday that it has spent a record sum buying Australian dollars in order to keep the foreign exchange market working. The Bank bought 3.15 billion Australian dollars in October, about 10% of its entire official reserves, valued at the time at $36 billion.

It is understood have since bought less as stability returned to the market.

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Wednesday, November 19, 2008

Don't spread "false information"

Our government's on to you

'Rumourtrage', or the spreading of false information would become illegal under a suite of measures put forward by Corporate Law Minister Nick Sherry to improve the workings of markets.

Speaking to the National Press Club Senator Sherry said although some forms of rumourtrage were already outlawed under the Corporations Act, the government needed to do more.

"After the collapse of Lehman Brothers in September the level of irresponsible stories and rumors that were floating around in the Australian market significantly increased," the Minister said.

"At least some of it was deliberate targetting of sound businesses."

"When you have a position where sound businesses are targeted, and I would accept it was by a small number of hedge funds - a very small number - irresponsibly, you have to act in the national interest"...

Conceding that the spreading of a false rumour was very difficult to prove, the Minister said that in normal market circumstances the practice caused little harm.

"Normally people simply shrug their shoulders and laugh, and think 'that's nonsense', but some of the stories spread after the Lehman's collapse are personally distressing, some simply shocking and clearly aimed to cause great stress, anxiety and even distress not just to the shares but also to the staff of the companies being targeted."

Declining the name the businesses he said had been unfairly attacked by hedge funds, the Minster said that for some it had been a "fair call".

"But when it reaches the point of sound businesses and it is not a fair call I think government has a responsibility to act," he told the Press Club.

The Minister has referred the practice of rumourtrage as well as closed analysts' briefings, margin borrowing by company directors and so-called 'blackout trading' to the government's Corporations and Markets Advisory Committee for advice. He has asked it to report within 6 months.

He said although blackout trading by directors and senior staff in the leadup to corporate results was outlawed by many companies, the rules were openly flouted.

"This is unacceptable and makes a mockery of the rules," the Minister said.

"Active trading by directors between the close of books and the release of results has the potential to affect confidence in the integrity of Australia's markets. From a policy perspective such confidence is central to manintaing Australia's attractiveness as an investment destination."

The blanket ban on short-selling was lifted Wednesday. Senator Sherry said the ban on short selling financial stocks would remain in place at least until January 27.

He called on the Opposition to support the bill before Parliament which would ban 'naked' or uncovered short selling in perpetuity.


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Worse than 2001 means...

Australia may be unable to avoid slipping toward recession, the Reserve Bank Governor Glenn Stevens has conceded.

Speaking to the Committee for the Economic Development of Australia in Melbourne last night Governor Glenn Stevens said that until recently he had been thinking that the Australian economy would slow much as it had in 2001.

In that year Australia recorded one single quarter of negative economic growth in September but avoided a second in December, escaping a recession as it is commonly defined - two successive quarters of negative growth.

As a result Australia along with Canada was alone among the major developed nations in avoiding the recession that swept through Europe and the United States.

But Governor Stevens said last night that recent international economic and financial events had made him believe that Australia would probably now experience "a more significant slowing than was otherwise going to occur"...

"It is fairly clear that a recession in the major country group, the G7, is under way," he told the audience.

However he believed that a bigger risk had been averted.

A potential collapse of an entire financial system with "massive repercussions throughout the world" was now unlikely.

"Markets are beginning to thaw. Actions taken to inject equity are stabilising a situation that could otherwise have unravelled quickly," Mr Stevens said.

While the guarantees that many countries were offering to depositors and banks were helping, the Governor warned that it was imperative that governments "specify as quickly as possible the parameters of their various guarantees so that market participants have a degree of certainty about how things will work."

Although the criticism was not directed at any country in particular, Australia is one of the countries that is yet to finalise the details of the wholesale funding guarantee that it will offer banks. The Opposition has argued that the means it plans to use - an administrative rather than a legislated guarantee, will be ineffective.

The Governor's comments came as Westpac entertained the possibility of a recession, saying that negative economic growth was possible in the September quarter and was likely in the March and June quarters.

"Growth will be around zero. Whether it's above or below zero is an open question, but two quarters of negative growth are certainly possible, said Westpac chief economist Bill Evans.

The Westpac-Melbourne Institute Leading Index slumped to an annualised growth rate of just 1.1 per cent in September from 3.5 per cent in August.

"This is a very disturbing fall," said Mr Evans.

The September fall was the biggest since the mid-1980s - greater than in the lead-up to the early 1990s recession.

"It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative," Mr Evans said.

The Reserve Bank Governor said the problem was that households fearful of an downturn were reigning in their spending in an attempt to conserve their wealth. If everyone attempted to do that simultaneously it would bring on a "paradox of thrift" making the downturn deeper and destroying more of their wealth.

Fiscal stimulus programs such as the $10.4 billion package announced by Australia would help, but even so, it was important for they passed the "good policy" test.

"Poor public policy proposals should not be accepted simply because they are presented as boosting short-term aggregate demand," the Governor told the Melbourne audience.


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Do we need more super?

I don't think so. As for the Minister...

Superannuation Minister Nick Sherry says he is unable to say whether the current compulsory contribution of 9% of salary is enough to enable Australians to retire in comfort.

"This is a very complex set of issues," he told the National Press Club.

"We specifically ruled out increasing the 9% employer contribution during the term of this Parliament. That stands and will stand.

"I am not confident that the 15% across-the-board solution that the former prime minister Paul Keating has advocated publicly is the correct solution.

"But we need to look in a very detailed way at what is the right solution."

Senator Sherry said the Henry Tax Review would examine the question when it considered the adequacy of retirement incomes and that he would present it with a submission.

"I am a great one for doing this thoroughly"...

"Actuaries say you need approximately two thirds of pre-retirement income. But that's premised on most australians owing their own home. It also depends how long you have been contributing to super. If you are retiring and have only had contributed 9% since July 2002, as many have, compulsory super actually won't have made a lot of difference to you. If you have been in the system for 35 years it will have made a massive difference."

"It's very complex and coming up with simple solutions isn't easy."

"The first issue to settle is the adequacy of the age pension. You cannot come to a conclusion about adequacy of 9% super until you come to a conclusion about the pension."

The Minister rejected a suggestion that the contribution rate should be increased in response to the poor returns generated during the financial crisis.

"I certainly don't think that increasing the level of contributions is the answer to the negative rates of return," he said. Over the long-term, super earnings remained on track to grow by an average of 5% per annum in real terms as projected in the government's Intergenerational Report.

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As with car sales goes the Australian economy

New Motor Vehicle Sales, just released by the ABS:


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But wait there's more - 0.75%, and then more

THE Reserve Bank board will cut Australian interest rates by at least 0.75 percentage points when it next meets in two weeks' time, and may cut by 1.00 points.

The minutes of the board's Melbourne Cup day meeting show that it rejected a recommendation from officials to cut by 0.50 points and instead cut by 0.75 amid alarm about "confidence among consumers and businesses".

Board members including the Governor Glenn Stevens, the Treasury Secretary Ken Henry and ANU economic modeler Warwick McKibbin were especially concerned about the erosion of household wealth.

The rout on share markets and the downwards drift in house prices had cut household wealth by 8 per cent in the 9 months to September. Board members feared that subsequent slides in share prices had made the slide greater.

"Members noted that there were few precedents for the current developments in household wealth," the minutes record...

After presenting the board with the staff recommendation for a cut in the cash rate of 0.50 points the Governor suggested that the members consider a choice between 0.50 points and 0.75.

They opted for the bigger cut in order to bring about "a further meaningful reduction in rates paid by borrowers and assist confidence among consumers and businesses". The aim was to bring rates "quickly to a neutral position".

The Reserve Bank has traditionally regarded the "neutral" cash rate as between 5.50% to 6.00%. This is the rate at which the Bank would be neither stimulating economic activity nor winding it back in. But bank officials believe that the neutral rate is now lower than that as a result of recent decisions by retail banks not to fully pass on cuts in the cash rate.

This would mean that the Melbourne Cup day cut to 5.25% only brought the cash rate back to neutral and perhaps did not quite do that.

Given that there is a clear need for interest rates to stimulate the economy at the moment, it suggests a need for a further big cut in December, with 0.50 points regarded as the bedrock and a cut of 0.75 points regarded as more likely.

Should economic conditions deteriorate further, and especially if the United States is declared in recession during the next fortnight a bigger cut of 1.00 points is likely.

Governor Glenn Stevens will expand on this thinking about rates in a closely watched speech to be delivered to the Committee for the Economic Development of Australia in Melbourne tonight.

A further cut of 1.00 points if fully passed on would cut the standard bank variable mortgage rate from around 7.7% to 6.7%, cutting the repayments on a $300,000 mortgage by an extra $200 per month. Monthly repayments would have dropped $570 from when mortgage rates peaked at 9.6% in August.

Although the Reserve Bank board is not due to meet again after December until February, the Governor Stevens stands ready to call an emergency meeting in January to deliver a further cut if needed. In January the Bank will have an indication of whether the $8.7 billion of stimulus payments due to be deposited into bank accounts from December 8 boosted economic activity or were largely saved.

The Bank has called unscheduled meetings in January twice before; in 1990 and 1992 - in both cases to deliver an emergency rate of 1.00 points.

Late yesterday the futures market was pricing in a cut of 1.00% in December and a further 0.75% in February with further cuts taking the cash rate to a low of 3.25% in May - its lowest level since the 1950s.

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Tuesday, November 18, 2008

Focus: Global free trade within reach?

Surely not. A global free-trade agreement within 7 weeks after 7 years of failure. That's the task that world leaders including Kevin Rudd have set themselves, and in Washington after the G-20 meeting Mr Rudd seemed to think it actually could happen. in the remaining weeks of this year.

"This is a tough objective, but one which we have to rise to the occasion to meet," he told reporters.

"The decision to further open the global economy to more trade and therefore greater growth and jobs growth through trade now seems to be more urgent because of the pressures bearing down on the real economy off the back of a global financial crisis."

He is right about the benefits...

Australian more than most countries knows that trade is the key to making both the buyer and the seller rich. We saw it with Britain in our early years. Had the British not bought massive quantities of wool and wheat from us - at one stage 90% of our exports - we would have remained mostly poor convicts. We saw it with Japan which became rich after the war because it bought minerals and fuel from us just as we became rich as we sold it. And we have been seeing it with China. The Chinese may have been getting richer this last 5 years, but thanks to trade, we have been doing it with them.

The World Trade Organisation says says that if the deal up for negotiation at the stalled talks got through, the globe would benefit to the extent of $US130 billion a year - about 0.25% of global GDP - worth having at the moment.

But it's not that simple. And most of the world's leaders know it. Some countries would do very well out of free trade - mainly less-developed ones who would like to sell to the United States but can't because of huge US production subsidies. Some parts of the US and Europe would do very badly. Bloated US sugar producers who have grown rich on a diet of fat subsidies would find themselves unemployed.

Would the US wear such a thing? Right now? It's just about to pump heaven knows how much into the pockets of its moribund big three auto makers - just as we have. The proposed US rescue - if not ours - might be illegal under the draft agreement that made it to the most recent round of Doha talks - the one the leaders now say they want to sign by December.

What about the billions of US government dollars about to be shoveled into the vaults of US banks? Anti free trade? You bet, if the US bank was competing against an Indonesian one for a contract.

Our Prime Minister and other leaders would like to think that these are the best of times to reach the trade agreement that's eluded them and their predecessors for years. It's probably the worst of times. Neither Rudd nor Bush nor Obama nor any of them is likely to want to put a single one of their citizens out of work right now - even if the long-run it would work out well.

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I'm not feeling good about Christmas...

MELBOURNE shoppers have shut their wallets to new spending with the latest figures suggesting no real growth in 4 months.

The Bureau of Statistics reports that trend spending has been flat in real terms since July, with Victorians spending no more than was needed to keep pace with inflation since then. This is despite tax cuts delivered that month that boosted average pay packets by around $20 per week.

NSW is the only state whose retail sector has performed worse than Victoria's with spending there sliding 1.1% since July. Nationwide, real retail spending slipped 0.1% in trend terms for the second successive quarter.

"It's an outcome that until recently the Reserve Bank was trying to achieve," said Commonwealth Bank economist James McIntyre. "Since then policy has turned on a dime, but monetary policy operates with a lag..

Spending on big ticket items and luxuries has nosedived...

Spending on recreational goods such as sporting and photographic equipment is down 11.8% over the year in real terms, its biggest dive in 25 years. Spending on cafes and restaurants is down 9.3%.

Westpac economist Bill Evans revised his economic growth forecast as a result of the news. He now expects zero or slightly negative growth when the June quarter figures are released in a fortnight's time.

Financial markets are now pricing a 94% probability of an interest rate cut of 1.00 complete percentage points when the Reserve Bank board next meets to consider rates on December 2.


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Japan is shrinking

Australia's biggest customer has slipped into recession.

Japan joins Germany and Italy as officially in recession, with the United States expected to follow despite co-ordinated action to boost developed economies.

The news will hit Australia especially hard as Japan as Japan provides $1 in every $5 of Australia's export earnings, about half as much again as does China.

During previous Japanese downturns its export industries have kept operating at full pace. During this one, demand for Japan's exports will slump as well, suggesting that Australia will be hit harder.

Japan's leading carmaker Toyota is forecasting a 70% slump in its profit. Cannon, Japan's biggest camera maker, is forecasting its first drop in profit in 9 years...

Japan's economy shrank for two consecutive quarters - the technical definition of recession - sliding 0.9% in the June quarter and then 0.1% in the three months to September, the firstsustained contraction in 7 years.

Japan’s economy minister Kaoru Yosano said the slump would continue.

“The economy is in a recessionary phase. The downtrend will continue for the time being as global growth slows," Mr Yosano said.

He warned that "conditions could worsen further as the US and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings".

Japan has announced an economic stimulus package in tandem with developed countries including Australia, but is unable to cut its official interest rate much further. It has already been cut to 0.3%.

TD Securities economist Joshua Williamson said the recession would hit Australian economic growth and push it nearer to recession.

"It suggests our growth will be slowing not just from the domestic side but also from the external accounts," he said.

Westpac yesterday conceded that Australian economic growth might turn out to be negative when the data is released next month, after worse than expected retail figures showed that in trend terms Australians bought less in shops in the September quarter than they did in the June quarter.

"The weak result lowers traises the risk of a flat or slight negative read on headline GDP," said chief economist Bill Evans.

"However, we expect a rebound in December as the stimulus package and lower fuel prices give households a major cash injection."

An Australian Industry Group - American Express survey released Monday found that 90% of Australian businesses felt no longer able to pass on increased costs. Only 12% felt able to take on above average or significant financial risks.

Nearly one in five businesses said borrowing from banks had become more difficult and 40% said they had no plans for capital investment during the next half year.

“While these strategies are sensible, and indeed may be essential for each individual business, they point very clearly to one of the ways the slowdown is likely to spread across the economy," said Ai Group chief executive Heather Ridout.

"With businesses tightening and delaying their own expenditures – both in response to and in anticipation of reduced receipts – an ongoing reduction in confidence and the expectation of a slowdown can quickly become self-fulfilling," she said.

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Monday, November 17, 2008

Japan is in recession

Just confirmed.

At the East Asia Forum, 
Tobias Harris profiles Australia's biggest customer, "tottering on the brink of ruin":


"Prime Minister Aso Taro has arrived in Washington for the G20 summit on the global economic crisis.

He leaves behind a country tottering on the brink of ruin. The OECD
has announced that, like the reappearance of cancer after remission, Japan may once again experience deflation in 2009. Consumer confidence is at a record low. The question on the table now is not whether Japan will be able to avoid recession, but how long the recession will endure. The government’s latest stimulus package is on hold until January, leading some within the LDP to wonder whether Mr. Aso has a handle on the situation. (The Economist summarizes the bad news here.)

The Japanese people, it seems, are battening the hatches.As Blaine Harden wrote in theWashington Post Thursday, Japanese citizens are not particularly enthusiastic about the government’s announced tax cuts, an attitude that might change when they start receiving payments, but then again, it might not. The Japanese public has been through this before, and rather than wait for the government to do the right thing, it seems that citizens are preparing to take care of themselves, whether by stuffing yen under the mattress, deferring big purchases, or doing a bit more shopping at the hundred yen shop. Little surprise that there is little taste for structural reform or any other kind of shock therapy"...


Read the full thing here.

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