Monday, November 09, 2009

What'd really hurt Australia? A swift US recovery.

So says David Hale:

Ask economic guru David Hale the worst risk facing Australia and you'll get a surprising answer.

"It's a really strong United States recovery," he says.

"The V-shape that some people are talking about. It would force the Fed to push up rates quite quickly in the second half of next year, not from zero to 1 per cent, but from zero to 2 or 3; it would reverse the big rally in the Australian dolalr and it might provoke a big global stock market correction."

With David Hale the answers are often surprising. But always well argued. One of the few US analysts to take a close interest in Australia he has followed our ups and downs from the banana republic era though the recession we had to have to the most recent mining boom and beyond.

And he's the first to admit he's not always right, at least not straight away...

"I told Kevin Rudd a year and a half ago, I've known Kevin for many years, he is a very good friend, I said the danger you face will be a two-tier Australia. The resource boom will get out of control is Western Australia and Queensland driving up the currency but also forcing the Reserve Bank to raise interest rates to 8 or 9 per cent. It'll punish the mortgage belt in Sydney and Melbourne and by the next election you'll have a lot of unhappy voters."

"Within three months we had the global financial crisis and that fear went away."

"But it'll will come back," he tells the Herald.

Chicago-based Hale, formally of Zurich Group has been on his own for seven years, providing a worldwide consultancy to firms such as the Commonwealth Bank, which has invited him to Australia.

On first name terms with virtually everyone in the politics and banking, at times he seems to have a better idea of what's going here than we do.

"I was at conference last week that the Federal Reserve had out at Santa Barbara California with all the Asian central banks and Ric Battellino, your Reserve Bank deputy governor was there. He was quite emphatic about the need to get your money market yields from what's now 3.5 per cent to 4 per cent as quickly as possible."

"He regards 3 per cent as exceptionally low, a truly emergency setting. Now that things are okay they can't stay there, they have to go to what the bank regards as a cyclically adjusted number for moderate Australian economy - that's 4 per cent. If growth gets really strong they might go back to 6 per cent."

Hale is expecting exceptionally strong growth, and he is expecting another two-Australia scenario with the outlying states - Queensland, Western Australia, and in his mind South Australia, benefiting at Sydney and Melbourne's expense.

"It's China. We passed a landmark in economic history in 2003, I wrote about this a great deal at the time. China displaced the US to be the world's dominant consumer of base metals. China's share of global copper consumption is 25 to 30 per cent; a decade ago it was 10 per cent. For every single base metal except for zinc China is now number one. China is half the global iron ore trade. Their steel production is 550 million tonnes; the US and Japan are 100 million tonnes each."

"It has has changed all the landmarks for the global business cycle."

"In the last cycle after the 2001 recession the copper price fell to 61 cents. That was because the US was still the dominant consumer. This time it bottomed six months ago at $1.50. It is now back to $3."

"Australia is the biggest beneficiary of the new China-dominated business cycle. After Australia is Brazil, Canada and South Africa. But your currency more than any other has become a proxy for perceptions of Chinese economic growth."

"I think you'll reach parity with the US dollar within month - by January or February."

"But it won't be really your doing. What drives this currency is no longer the Australian economy but the Chinese economy."

"Now the Australian economy can makes some difference because of what it means to the Reserve Basnk and so on, but lets face it, what has driven this market over the last year is perceptions of China."

And China is far from in sync with the US.

"China's had 15 per cent in growth in retail spending," says Mr Hale. "It's had a 20 per decline in exports but a 30 pc growth in fixed asset investment."

"A decent recovery in the US would help China, and negative or zero US growth would restrain China somewhat, but a really strong US recovery, the V-Shape that some are talking about, could force a global stock market correction and unsettle China."

"Right now the fed is planning on interest rates staying at zero for nine or more months, maybe even a year, but if we get a V-shaped recovery and we are surprised, that could change very very quickly."

When the US does push up interest rates Mr Hale sees a correction in the Australian dollar, sliding from somewhere above US$1 to around 85 US cents. But he says the days of a 60 US cent dollar are long behind us. China and its need for Australian resources have become too important.

Published in today's SMH and Age

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