Austerity is dead, long live austerity

With soft Australian growth data coming in amid even more disappointing global figures, Europe is starting to holster austerity theory and the Reserve Bank should be doing the same.

It had to happen and the message will spread.

Pierre Moscovici, Finance Minister in France, has put the kybosh on fiscal and economic austerity saying “we are witnessing the end of the dogma of austerity – austerity on its own impedes growth”.

Moscovici’s comments followed the European commission’s decision to extend the deadline by two years for France to meet its budget targets. The extension was granted because of ongoing economic weakness which was undermining government revenue and blowing out the budget deficit.

As obvious and logical as it is to ignore austerity when an economy is weak, it amazingly remains a matter for debate that fiscal austerity – that is spending cuts and tax hikes, even when an economy is in recession – has some merit. Unfortunately, in many countries there have been a range of absurd austerity measures in recent years as the fiscal zealots impose their wacky Austrian economic theories into the real world. It has meant that many countries are not only mired in recession but have fallen into depression.

It is a pity for the many millions made unemployed in Greece, Spain, Ireland, Spain, Portugal, the UK and elsewhere that it took so many years for the austerity theory to be shown up for the snake oil it is.

Now, thankfully, fiscal austerity is being abandoned for the sake of growth, jobs and societal wellbeing, including here in Australia in a less dramatic way with the government no longer pumping for a budget surplus in 2012-13 ‘come hell or high water’.

This is a refreshing policy development given the recent economic news.

In the eurozone, fiscal austerity has as its ugly face five straight quarters of falling GDP and a record high 12.1 per cent unemployment rate.

Adding further weight to the souring of attitudes towards austerity was news that in the depression laced eurozone, the composite PMI (services plus manufacturing), came in at 46.9 points in April. While this represented a 0.4 point rise from March, the index has been below 50 for more than a year. 

According to Chris Williamson, the Chief Economist at Markit, the PMI suggests that “the eurozone’s downturn is likely to have gathered momentum in the second quarter” and the result is consistent with GDP falling by around 0.4 or 0.5 per cent. In other words, the PMI suggests the eurozone depression will continue into the middle of 2013.

The RBA board members will arrive at Martin Place this morning to consider whether or not to cut interest rates. They will be greeted with this news plus the fresh information closer to home that the various purchasing managers indices have taken a dip lower.

Perhaps of most direct importance to Australia in the news that the services purchasing managers indexes for both China and India, the second and third largest countries in the world, are tilting to the down side.

In China, the services PMI dropped to 51.1 points in April, down from a solid 54.3 in March. The new orders component of the PMI slipped to its lowest level in 20 months. The prospects for Chinese GDP growth returning to 8 per cent in the near term look increasingly remote.

In India, the services PMI fell to 50.7 points to record the third straight month of decline and it is now at its lowest level since October 2011. According to HSBC, services account for around 60 per cent of Indian GDP. The faltering business conditions in the services sector in India follows the decision of the Reserve Bank of India last Friday to cut the indicative policy rate (the repo rate) by 25 basis points to 7.25 per cent.

Amid these updates of disappointing global conditions is ongoing softness in the recent run of local economic data here in Australia.

Yesterday, I argued that the RBA board should cut interest rates at today’s meeting (Time to cut along the rates bias, May 6). 

They still should.

That view was expressed before news emerged yesterday of a drop in the ANZ job advertisement series, a drop, albeit modest, in retail spending in March and confirmation that inflation remained well in check into the June quarter.

Overnight, Dun & Bradstreet* released its monthly Business Expectations Survey which had as its key points a further drop in expected capital investment, particularly in manufacturing, and ongoing soft demand for employment and credit.

This news fits with the less than robust story for growth in the near term.

The sooner the Reserve Bank twigs to the fact that the risk of an inflation blow out is a mere fraction of the risk of softer growth if it does nothing on rates, the better.

That day has arrived – get set for an interest rate cut this afternoon.

*Disclosure: Stephen Koukoulas acts as a part-time Economic Advisor to Dun & Bradstreet.