Wednesday, April 01, 2009

Kohler: Get real. The bad stuff is just beginning.

"The OECD’s latest economic outlook report is, or should be, a glass of cold water in the face.

There is an air of complacent unreality in Australia at present, as if this country can somehow escape the Great Recession. The ACTU even has a claim in for a general pay rise!

When I travel around talking to groups and individuals about the crisis these days, what everyone wants to know is: when will it be over? In fact the question should be: when will it begin?

Australia has so far been cocooned by political and economic insouciance and prettied up by well-targeted government mascara: the bank deposit guarantee, and state government debt guarantees, the short selling ban on financials, the first home buyers grant, the 30 per cent extra tax deduction for business investment until June 30 and of course the huge fiscal stimulus, and especially the cash handouts.

We also steadfastly cling to the “technical definition” of recession – two consecutive quarters of negative GDP – which means we won’t have to admit to being in recession until early June, when the March quarter national accounts are released.

And so when RBA deputy governor Ric Battellino, quietly dropped in a speech in Brisbane yesterday that GDP is likely to fall in 2009, it was news. The rest of the world long ago came to terms with this; Australia still has not, and by the weekend will probably go back to thinking we can avoid recession...

I think the most bracing thing about the OECD’s report this morning is its commentary on world trade, and in particular the following statement in Box 1.2 on page 19 of Chapter 1, headed 'International Trade in Free Fall':

“The trade forecast associated with this Interim Economic Outlook is in line with the models…under the assumption that the unexplained part of trade contraction is a one-off shift in the trade level for which the main reasons still have to be identified.”

In other words the collapse in world trade is worse than anything seen before and is a mystery that can’t be explained either by history or the OECD’s models."

The full thing's here.