Yesterday Michael Chaney expressed what most people in business are feeling right now.
The chairman of National Australia Bank and Woodside Petroleum called the coincidence of a decline in the terms of trade and a long election campaign a “perfect storm” and added: "I would hope that after September, whatever the result is, people are a bit more confident and start spending again."
Yes, well, good luck with that. The fact that there will be an election later this year was hardly a surprise and the result is already clear: no need to wait to start spending.
The original Perfect Storm – the Halloween Nor'easter of 1991 – had three causes coming together, Australia has two: the terms of trade decline, otherwise known as the end of the Chinese resources boom, and whatever is causing domestic demand to contract.
In last week’s national accounts, GNE or gross national expenditure (which is GDP minus external trade, so a proxy for the domestic economy) declined for the second consecutive quarter – that is, we’re in a “domestic recession”.
Is that caused by the long election campaign, as Michael Chaney asserts? I doubt it, although three years of feverish politics certainly haven’t helped. Government has been reasonably stable these past three years, with plenty of legislation passed and no threat to Supply, but politics has been in a state of constant uproar.
I suspect the main reason domestic demand is declining is the high level of household debt, which is producing a return to higher savings to repair personal balance sheets.
That process is likely to continue after the election, especially if a new government imposes new austerity measures to repair its own balance sheet.
Yesterday Goldman Sachs economist Tim Toohey lowered his GDP forecast for this year and next, and said the probability of recession was now 20 per cent, the highest probability in the post-war period that didn’t result in a recession, apart from the GFC. “The general conclusion is that a GNE recession does not equate to a genuine recession although on some measures the momentum evident in the broader economy has continued to deteriorate.”
The heading on a chart comparing output in the mining and non-mining sectors, says: “Without a strong recovery in the non-mining sector Australia will be in recession in 1H14” (the first half of 2014).
And as Toohey points out: “Counter cyclical fiscal policy is not being entertained, indeed, it appears the opposite remains the base case for both major political parties.
“Meanwhile, in the background the state governments are busy implementing their own form of fiscal consolidation that risks compounding events.”
In some ways a recession would suit an incoming Coalition government. The lack of one for 22 years has produced an expectation that there will never be any losers in economic reform. Mining tax, carbon tax and Gonski education reforms have all been over-compensated.
Worthwhile reform requires losers because it is always designed to remove economic capture by a vested interest; all the great reforms of the past needed a crisis atmosphere to strip some group or other of its monopoly rent.
Tony Abbott just might get one next year.
Alan Kohler will be hosting two Ashes lunches with Gideon Haigh and Stephen Fay (former editor of here.and author of books about The Bank of England and the collapse of Barings) on June 25 in Sydney and June 26 in Melbourne. To book a table click