We are lumbered with a surplus of politicians and a deficit of statesmen.
EUROPE is sliding into recession, and the world is sliding with it. That's not all Europe's fault, but its slump will permeate every part of the world economy in some ways, adding to Australia's problems, in other ways, reducing them.
None of us can see through the fog ahead to know how bad it will be. But some things are clear. Each government is focused on its own political needs. No one seems to be in charge of the world economy. We have many politicians, but no statesmen. And we have no consensus on a solution that might work.
The critics were right to warn that Europe's past "solutions" were inadequate to resolve its problems. Instead, the problems have grown. Any solution to them now would be at the cost of the successful countries, and their voters feel they have no responsibility to bail out those in trouble. The path to a resolution is blocked by political deadlock.
The crisis in Europe is the one that could bring down the global economy. But growth is slowing around the world, and the common factor is a loss of confidence.
Last week's job figures confirm that the US recovery has lost its strength. China's housing market is in recession, driving down its manufacturing and steel production, which in turn is driving down prices for Australian coal and iron ore. India, swimming in debt and politically gridlocked, has seen its growth rate slump to a nine-year low.
Australia has its own problems. Each new data set confirms its growth is mostly in mining and related sectors, which are just a sixth of the economy, mostly in Queensland and Western Australia. The mainstream economy in the south-eastern states is at best growing sluggishly, at worst going backwards.
This week brings an avalanche of data, including new figures for GDP, unemployment and the current account deficit. Yesterday we learnt corporate profits have fallen 10 per cent in six months: mostly in mining, from a high level. But in the past two years, manufacturing profits slumped 34 per cent, while manufacturers' unsold stocks rose to an 11-year high. That spells job cuts ahead.
The Bureau of Statistics does not have the data to measure states' output it just takes an informed guess once a year. But take all the data we do have, and it suggests Victoria, South Australia and Tasmania are all going backwards. Their industries have borne the pain of the higher dollar without the gain of mining investment and boom prices. And at federal level, no one cares.
Interest rates remain far too high. Even after last month's cut, rates for home buyers, small business and depositors are at 2004 levels, when the economy was in a broad-based boom, with growth of 3.75 per cent and adding 265,000 jobs. That is very different to what we are experiencing now, or what lies ahead.
The dollar remains far too high, still 35 to 40 per cent above its 20-year average from 1985 to 2005. Yet for business, the silver lining in Europe's storm clouds has been a fall in the dollar. Since February, it has slid 10 per cent against the US dollar, and 7.5 per cent against all currencies. Unless you are travelling overseas or buying imports, that is good news, because it reduces pressure on businesses that face global competition. If it is sustained, it will save jobs and incomes, and reduce the risks facing the economy.
One of the most important and vulnerable of these is home prices. Many of us might like to see home prices fall, but you would not want to see them collapse. The RP Data-Rismark index reports that the fall in home prices is accelerating at a worrying rate: down in the year to May by 8.4 per cent in Melbourne, and 5.3 per cent nationally. When house prices collapse, they take wealth and consumer confidence with them. Collapsing house prices played a key part in the intensity of the recession in the US, Spain and Ireland. It's another good reason for the Reserve Bank to cut rates today.
We don't know how serious this will become, but it is no time for political stunts. Treasury secretary Martin Parkinson was right when he said on Thursday that in a global recession, Australia has the ability to fight back with both interest rate cuts and budget measures to defend the economy. "Our fiscal position is so incredibly healthy vis-a-vis the rest of the world that we can actually provide stimulus", he said. "We could, if necessary, actually go back into deficit to support activity."
Tony Abbott endorsed this on Friday morning, then backflipped a few hours later to declare that the promise of a budget surplus should have "no ifs and buts". Is he telling us an Abbott government would rather see Australia go into recession than run a deficit? Seriously?
Frequently Asked Questions about this Article…
What is driving the current risk of a global recession and why should investors care?
The article says Europe is sliding into recession and that slump is spreading worldwide. Key signs include weakening US job growth, China’s housing-market recession reducing manufacturing and steel output, and India’s slowing growth. For investors, these trends mean lower global demand, weaker corporate profits and heightened market uncertainty—factors that can hurt returns and increase volatility.
How could Europe’s economic crisis affect Australian investors and the local economy?
Europe’s crisis can permeate the global economy and affect Australia through lower demand and commodity prices. The article notes falling prices for Australian coal and iron ore driven by China’s slowdown, and that growth in Australia is concentrated in mining regions while much of the mainstream economy is sluggish—so investors should expect uneven impacts across sectors and regions.
What do recent falls in corporate profits and rising unsold stocks mean for investment risk?
According to the article, corporate profits fell about 10% in six months, manufacturing profits plunged 34% over two years, and manufacturers’ unsold stocks hit an 11‑year high. Those signs point to squeezed margins and inventory buildup, which typically lead to cost cutting and job losses—increasing risk for companies, shareholders and consumer‑facing sectors.
Why are interest-rate moves important for everyday investors right now?
The piece highlights that interest rates are still high relative to the actual growth environment despite a recent cut. Lower interest rates can support borrowers, boost consumer spending and help housing. For investors, rate cuts from the Reserve Bank could improve conditions for growth assets, reduce downside risk for heavily indebted households and influence bond and property markets.
What is happening to Australia’s housing market and why does it matter to investors?
The RP Data‑Rismark index cited in the article shows accelerating falls in house prices—for example, Melbourne was down about 8.4% in the year to May and national prices down 5.3%. Sharp house‑price declines can erode household wealth and confidence and have amplified past recessions, so investors with exposure to property, banks or consumer sectors should monitor housing trends closely.
How does movement in the Australian dollar affect businesses and investment decisions?
The article notes the dollar remains high compared with its long‑term average but has slid about 10% against the US dollar and 7.5% against all currencies since February. A sustained weaker dollar can help export‑exposed businesses and firms facing global competition, potentially saving jobs and supporting incomes—while a stronger dollar would hurt exporters and manufacturers.
Could the Australian government use fiscal stimulus or run deficits to support the economy?
Yes. Treasury secretary Martin Parkinson is quoted saying Australia’s fiscal position is healthy enough to provide stimulus and, if needed, go back into deficit to support activity. The article also notes mixed political messages from leaders, so investors should watch for actual policy moves and the political will to implement fiscal support.
How does political leadership or political stunts influence economic confidence and investment outlook?
The article argues we have “many politicians but no statesmen,” and that political deadlock and inconsistent messaging (for example, flip‑flopping on whether a budget surplus is sacrosanct) block effective solutions. For investors, clear, consistent policy and leadership matter because uncertainty and political brinkmanship can erode confidence and hinder timely economic support.
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