No need for panic

Be alert but not alarmed. Now is not the time for unreasonable pessimism.

Be alert but not alarmed. Now is not the time for unreasonable pessimism.

SINCE last November I've dedicated a number of these columns to dispelling the myths that Australia could somehow be insulated from the global credit turmoil which is sending the US economy into recession and probably the British one as well.

Remember back to the end of last year and the number of commentators claiming Australia was "de-coupled" from the US and we would feel few implications of the credit crunch. It was absolute bunkum.

We are feeling the effects of the global crisis but, as I've said all along, the Australian economy is in good shape to withstand the full impact of the downturn.

My fear now is that the pendulum has swung way back to the other extreme . from foolish optimism to unreasonable pessimism. It is a timely reminder that economies are made up of highly emotional, living, breathing, human beings: you and me.

We sometimes see economic figures as some intangible index rather than a measurement of how we're all feeling.

That's why I'm concerned with these latest consumer sentiment and business confidence figures which have plunged to levels equivalent to the 1990 recession.

The economy has certainly slowed, the sharemarket has crashed and property slowed but it's nowhere near as bad as the last recession. Let's put things into perspective:

* the economy contracted 1.7 per cent in the last recession (this year Australia's GDP will still grow by about 2 per cent).

* unemployment was 10.8 per cent (about 4.5 per cent this financial year).

* official interest rates were 18 per cent (7.25 per cent now) and mortgage rates rose to 17 per cent (9-10 per cent).

* inflation 7.5 per cent (4 per cent)

There is just no comparison between the last recession and now.

But we "think" it's the same and if we act on that psychology and go in to our shell then there is the danger it may become a self-fulfilling prophecy.

I reckon there are a couple of things having a major impact.

Most importantly, we've only recently emerged from a long period of cheap, freely available money. It wasn't that long ago that we were hit with a raft of what I called "equity mate" marketing programs from the banks encouraging us to borrow against our houses to finance our lifestyles and "max" out our credit cards.

Household debt levels went through the roof which exaggerated the financial blow of a small lift in interest rates. If you compare debt levels between now and the last recession, the financial impact today is probably just as big even though actual interest rates are still half what they were back then.

Then there's the change in business and consumer expectations. After 17 consecutive years of positive economic growth we have a whole generation of consumers and business owners who have never known an economic slowdown or recession.

For older generations, a recession is when you lose your job, inflation is rampant and the economy is going backwards.

But now there's a generation who reckon it's a recession when you can't afford a new plasma TV immediately or when customers cut back their sales orders.

In the past, tightening the belt was part of a common and frequent cycle while today it's a new experience for a lot of Australians.

The crash in the sharemarket has also added to that negative sentiment. For the last 15 years its been more profitable to invest in bank shares than in any product offered by a bank to its customers. Since the start of this year bank shares have ped 30 per cent and superannuation fund returns are suffering.

Last week's break in the market below 4900 points means there is a higher risk of continued falls than a significant bounce back.

While we're hit with the sharemarket's woes every day through the media we also have that nagging feeling in the backs of our minds that our house values are starting to weaken as well. Even though some real estate agents are still trying to put a positive spin on the property market, our friends and relatives are telling us how hard it is to sell and how they're having to prices.

The combination of all these factors starts playing with our minds and the consumer sentiment and business confidence indexes reflect it.

The reality is that it's a time to be alert, but not alarmed.


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