Thursday, March 17, 2011

An economic crisis for Australia it is not

Prime Minister Gillard has talked up the Australian economy amid continuing nervousness on financial markets saying it is strong and might even benefit from Japan's recovery.

Share markets in both Japan and Australia recovered some of their losses yesterday, the Nikkei closing 2 per cent higher and the ASX 200 regaining 29 of the 97 points it lost Monday.

Futures traders are no longer as fearful of a calamity that would force Australia's Reserve Bank to cut rates, pricing in a 23 per cent chance of a cut next month, down from 70 per cent.

As a Government, we have a standard position of not commenting on market movements, and I do not intend to do so," the prime minister said.

"But at this stage, we are certainly - certainly not - making any dire predictions of the impact on our own economy. Australia’s economy was not knocked off course by the global financial crisis, nor by the floods and natural disasters we sustained over the summer."

"The general pattern with natural disasters is there is a short term impact and then growth tends to be restored as you move into recovery and rebuilding mode."

Private sector economists agreed... almost all saying the the initial reaction to the crisis was overdone.

"The direction of the move in Australian financial markets is understandable. As is the flight to perceived safe havens. But the magnitude of some of the moves isn't," said Commonwealth Bank chief economist Michael Blythe.

"Markets that can jump from pricing in little chance of any Reserve Bank move to an implied 70 per cent chance of an imminent rate cut and then back to a 20 per cent chance in the space of a few hours have clearly parted company with fundamentals."

"Already there are reports of Japanese companies which had closed down production opening up again," said Macquarie bank economist Brian Redican. "Yes, Japan remains Australia's second largest export destination, but while some export sales will be temporarily diverted, Japan's ongoing demand for coal, iron ore or beef won't be affected. Will any mining companies cease production? No. Japanese tourism might decline for a while, but only 6 per cent of our tourists are from Japan now."

"The problem is that while it is easy for analysts to say that market movements are not justified, it is not rational for any individual investor to try to take on the market, and
hence no mechanism to force it back towards equilibrium."

AMP chief economist Shane Oliver said during Japan's 1995 Kobe earthquake Australian exports fell for one quarter and then bounced back strongly.

"Our imports of cars, electronic goods and other products from Japan may see a short-term disruption but it is unlikely to last long, with other global producers likely to step into the breach," he said.

Stephen Roberts of the Australian arm of Japan's Nomura Securities believes Australia could benefit from Japan's nuclear shutdowns meeting its increased demand for coal and liquefied natural gas.

"Together they already amount to more than 50 per cent of our exports to Japan. In the short-term Japan will substitute non-nuclear for nuclear fuels to replace lost generating capacity, and in the long-term a greater emphasis on LNG as a source of power and the need to find a secure supply has the potential to add to the large pipeline of LNG investment projects in Australia," he said.

Published in today's Age

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