Thursday, March 05, 2009

Not so special after all

Tim Colebatch in today's Age:

"AS SHAREMARKETS melted, the world went into recession, and so did we. That shouldn't be a surprise. The real questions are how deep will it get, and how long will we stay in it.

Long ago, Australia went into recession and out pretty quickly: economists call it a V-shaped recession, and you can see why. But the 1990-91 downturn turned into a U-shaped recession, when we bumped along the bottom for a couple of years before things turned up. This time some are speculating that we could be in for an L-shaped recession.

The 1990-91 recession was not that deep initially, but became very painful because it went on so long, sending unemployment soaring to 11 per cent.

The Rudd Government and the Reserve Bank learnt the lesson: this time they have rapidly emptied out money over our backyards — Rudd with $70 billion of hand-outs and new spending, the Reserve by slashing cash rates to their lowest level in almost 40 years.

But the December quarter GDP figures show that initially, at least, it didn't work...

Australia's output fell 0.5 per cent because households saved their hand-outs instead of spending them, business stockpiles — especially new cars — piled up, so manufacturers moved quickly to cut back supply.

Remember that Australia's population is growing by 1.6 per cent a year, or 0.4 per cent a quarter. The real bottom line for economists is not GDP, but GDP per head. Australia's GDP per head fell 0.9 per cent in the December quarter, and 1.3 per cent over 2008.

Labor wants us to think of Australia as a stand-out performer among the rich nations. In one important sense, that's true: our financial sector is in far better shape than in most Western countries.

But as a comparison shows, our economy is going down with the rest, and in per capita terms, at fairly similar rates.

Take out the farm sector, which is driven mainly by rain, and non-farm GDP fell 0.8 per cent for the quarter, and was even down over the year. Non-farm output per head was down 1.6 per cent over the year. Sorry Wayne, there's no gold medals for that.

What does the data tell us? In a nutshell:

. Consumer spending has barely grown since March. Originally, it was pushed down by petrol prices and the Reserve Bank's interest rate rises. But now it is just driven by fear.

. Households' disposable income soared by a staggering 5.9 per cent in the December quarter, thanks to Kevin Rudd's cash splash and the Reserve's interest rate cuts, and by a whopping 13.6 per cent over the year.

Don't let anyone try to kid you we were doing it tough. Quite the opposite: we were just scared, bloody scared.

. So instead of spending the money, we saved it.

Net household saving rose from $202 million in December 2007 to $5.7 billion in September 2008 to $15.1 billion in December 2008, while new cars stood unwanted in the car yards.

Did Labor's cash splash work? Well, you judge. Household spending rose $1.2 billion in the quarter, household saving rose $9.5 billion. Debate over.

Wayne Swan claimed yesterday that most of the rise in savings came from households saving their interest rate cuts. The figures show that is nonsense: households' interest bills fell only $3.1 billion, about a third of the rise in savings.

Our savings grew because of the cash splash, which future taxpayers will pay for.

The issue would not matter so much had the Government wasted just $9 billion on its cash splash. But it ignored the critics and the evidence, and handed out another $12 billion in its February package.

Look for more big rises in household saving in the March and June quarters — while your share of the bill mounts to $1000 a head plus interest.

The epicentre of the downturn is manufacturing. It accounted for nearly all the net fall in output, and had shrunk 5 per cent in six months even before all this year's job cuts.

It's ugly, and there is no lever anyone can pull to stop it getting much uglier yet."