Can Australia avoid a recession?

The real state of the Australian economy

Governments around the world are scrambling to try and limit the effects of the financial crisis. The credit crunch has now effected the entire banking system and in many countries the effects are starting to be felt in the real economy.

In the US for example an estimated 10,000 people per week are loosing their homes due to mortgage defaults. Mortgage defaults are also on the increase in many other parts of the world. Tens of thousands of jobs have already been lost in the finance sector and thousands more job losses are predicted in retail, manufacturing and IT.

Recession looms in many parts of Europe, Asia and the US. In Australia however, some economic commentators are saying that, mainly due to the mining boom and exports to China, the economy will be able to avoid a recession.

All of the major parties in Australia including Labor, the Liberals and the Greens have been unable to answer the questions that workers are now asking in relation to the safety of bank deposits, the manufacturing industry and the property market. Workers also want to know if Rudd’s stimulus package will actually work.

The $10.4 Billion stimulus package

In October Rudd unveiled a finance industry package that guarantees all bank deposits up to $1 million. He also announced a $10.4 billion economic stimulus plan (half of the budget surplus) which was aimed at reviving consumer spending to prevent the economy sliding into recession.

Thanks mainly to credit cards, Australians borrowed $250 billion last year and spent it on goods. This massive amount of spending assisted in stimulating the economy.

But consumer confidence has now plummeted and the overall trend has been weak since the end of 2007. There has been a slump in consumer spending and this reflects a slowing in growth of real household disposable income. This is down to 2 per cent over the year to mid-2008. With official inflation hitting 5 per cent this means significant wage cuts are already taking place.

An indicator of spending can be measured by motor vehicle sales. Car sales are continuing to fall and are now more than 10 per cent lower than at the end of 2007. The slowdown in spending will lead to thousands of job losses in retail. The first to go will be casual workers, many of whom are women and young workers.

It is clear that Australians are now at the end of a period of spending other people’s money. The $250 billion credit that fuelled consumer spending last year will be down significantly in the next year. Therefore, a $10.4 billion stimulus package is actually minuscule compared to the potential loss in spending by Australian consumers.

Those eligible for the one off payments proposed in Rudd’s stimulus plan will more than likely not spend that money but use it to consolidate their already massive debts. Since a big chunk of the Australian economy is made up of consumer spending, a contraction will have severe repercussions. Rudd’s intervention into the declining market will have little overall effect.

Isn’t the Australian economy different because of the mining boom?

Some economists claim that the mining boom and exports to China will save Australia from sliding into recession. Some of the more serious analysts however are now echoing the views of the Socialist Party. They concede that China’s slowdown in growth will significantly affect the Australian economy.

China has serious problems on its hands. Firstly its main export markets are facing a recession therefore impacting on demand. Growth in export volumes from China to the major economies of the US, Japan and Europe have fallen markedly over the past year.

Growth forecasts for China are now being scaled back for 2009. On that basis demand for Australian coal and iron ore is already starting to fall.

Share markets and property values in China are also falling. As construction and the boom in China weakens that in turn weakens the demand for steel. The slowdown in production of steel, concrete and energy has already been significant.

Until recently rising commodity prices had pushed up the Australian dollar. The rise in commodity prices boosted our terms of trade and acted as an additional windfall to growth, company profits and government revenues. This is now coming unstuck.

Latest figures have indicated that the prices of iron ore and coal are likely to decrease by between 15 and 25 per cent next year. This is a huge blow to the mining boom and the overall Australian economy. This is the reason for the nervousness that exists inside the big mining companies.

Far from the Chinese economy keeping the Australian economy out of recession it is likely that declining growth in China will only help to create severe economic difficulties in Australia.

Manufacturing

In recent months we have seen a steady stream of job losses in the manufacturing sector. Hundreds of jobs have been lost in the car companies and this has led to thousands more being made unemployed in the auto components sector. Unions claim that for every job lost in a car company six more are lost in related industries.

Even during the upturn, manufacturing went backwards due to a lack of investment and the high Australian dollar. The sector is in a very weak position and only makes up 21 per cent of exports. Because the Australian economy is now dominated by services this will make it much more difficult to come out of a downturn.

As the situation gets worse, more and more manufacturing jobs will be lost. Any argument that the weak Australian dollar will give a boost to exports and therefore the economy will not materialise. This is not only because of the lack of investment in manufacturing but also because the world export market is expected to shrink.

Property

The International Monetary Fund (IMF) has suggested that Australian real estate is overvalued by at least 25 per cent. This makes Australian homes some of the most overvalued in the world.

Due to massive amounts of speculation a housing bubble was created which has led many people to take out mortgages which are bigger than the real value of their homes. As prices drop closer to their real values this will mean many people will owe more than they own.

Evidence is already emerging to indicate that growing numbers of Australians are struggling to pay their current debts. This is resulting in growing bankruptcies and credit agreements as well as increasing mortgage defaults. This will increase as unemployment rises in the coming months.

Linked to this, it is estimated that up to 65 per cent of small businesses use their family homes as security to obtain business finance. If property prices drop closer to their real values, the capacity of small business owners to keep their doors open will be severely limited.

With house prices falling and significant unemployment, the heavy debt load being carried by many Australians is likely to get worse. Therefore the crisis in property is going to be another part of the downward drag on the Australian economy.

Are the Banks safe?

Kevin Rudd and Wayne Swan have been reassuring ordinary people for some time now that Australian banks are safe. They tell us that Australia has one of the best regulatory systems in the world.

But Australia’s four largest banks are far from immune to the global financial crisis. The shares of all the big banks have plummeted on the stock market. This is despite all of them issuing statements saying that they have relatively small exposures to bad debts. This is an indication that investors are not convinced.

What Rudd and Swan don’t explain about the banks is that there is a real possibility of a loan-loss cycle. This is where housing prices fall and the banks struggle to recover loans from mortgage defaulters. Some commentators are suggesting that unemployment will rise to 9 per cent next year. This will put people in much less of a position to pay their loans.

Australian banks are actually more vulnerable to the credit crunch than many of their global counterparts because of their high levels of loan-to-capital ratios. In Australia banks are leveraged 25-30 times.

This means they have given out 25-30 times more loans than they have in capital. Most other banks around the world are only leveraged 15-20 times. This means that Australian banks are more susceptible than most to a run on investments and a run on deposits. Even if we saw a moderate loan-loss cycle this would create significant bad debts and losses.

Australian banks are dependant on each other and the international banking system. If one bank did happen to go under the Australian financial system could be paralysed overnight. Such a situation would have severe impacts on the overall economy.

The banking guarantee and stimulus package announced by the government did initially give some stability to the banking sector. But within days much more instability was created. By only guaranteeing certain investments, the Government created a fault line which raised the prospect of a run on banks and financial institutions. The problems with the government’s package are likely to be ongoing.

The financial and banking crisis has come before the crisis in the real economy but it is likely to be made much worse by it. If the Australian government does not back up its guarantee with action then an extreme banking crisis is possible. If however they are forced to bailout banks, as other countries have, the guarantee they have given will mean that the indebtedness will be spread to the government coffers eliminating the budget surplus. This could create the basis for a budget and financial crisis in the state.

Will there be a recession and will it be short?

It is clear that Australia is not just facing one or two economic problems but in fact a series of crises. Regardless of what some commentators say it is likely that Australia will move into to recession quite quickly. This will have a huge effect on the lives of ordinary people.

Some optimistic economists claim that we will see a downturn but that it will be soft and short. The reality is that the property bubble, external credit and international demand from China have been the key motors for Australian growth. What the optimists ignore is that all of these areas of the economy are facing a significant decline.

The fact that the ratio between household debt and household income is hovering around 160 per cent is also extremely significant. This means that on average for every $100 we earn, we owe $160. Back in 1991, in the midst of the last recession, we only owed $48 for every $100 we earned!

Credit has been artificially used to sustain the world and Australian economies for many years. This indebtedness means that the economic difficulties will be longer and more drawn out. It is impossible to say with certainty how severe or how long the coming recession will be, but the one certainty is that that there is still plenty of bad news to come. There will undoubtedly be more attacks on jobs, wages and conditions.

The economic crisis shows the need for workers to be prepared for the economic conditions that are unfolding and the need to be organised in fighting trade unions to defend living standards.

The bipartisan response to the crisis from the two main capitalist parties also shows that workers need their own independent political representation. Both Labor and the Liberals have made it clear that they think it should be workers and not bosses who pay for the crisis. As the two main parties close ranks around their big business mates, the call for a new workers party will gain ground in the period ahead.

Critically, this crisis also shows the need for a total reorganisation of the economy. Economic crisis is not inevitable. It is a product of the unplanned capitalist system that puts profits before the interests of ordinary people. The alternative is a democratic socialist planned economy that secures the living standards of all workers.

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