Saturday, January 24, 2009

Want the good news? (You won't like it)

Here's the good news.

Managing the Australian economy just became simpler.

Until this week it genuinely wasn't clear whether Australia was heading into a recession along with the rest of the developed world or whether the government's $8.7 billion of stimulus cheques and our special position as a supplier of raw materials and to both Japan and China would save us.

Wayne Swan, Kevin Rudd and the Reserve Bank could be forgiven for not knowing quite which way to turn. No longer.

Japan takes one in every four of the export shipments that leave Australia. China took the best part of another one and was catching up fast. Both are now shrinking their operations, if not their entire economies.

JP Morgan's calculations suggest that customers making up 48 per cent of Australia's exports are headed for recession. ABN AMRO last night amended its forecast for an Australian recession...

It deepened it.

There's now no doubt about the direction in which we are heading and no doubt about the directions in which the Reserve Bank and our leaders should move.

A cut in interest rates of another 1.00 percentage points next month is now entirely likely, as are tens of billions of dollars more government spending and tax cuts that will push the budget well into the red.

They won't manage to stop a recession. But they might manage to make it shallow and to keep the jump in unemployment to just a few percentage points instead of the five or so per cent we got last time.