Economy: Short-term stimulus; long-term jitters

ABC ONLINE

The Reserve Bank and the Treasury are relying on demand from China to insulate Australia from the global economic crisis, but a leading firm of financial analysts has cast doubt on this optimism.

AUSTRALIAN

THE Rudd government’s fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.

The Reserve Bank and the Treasury are relying on demand from China to insulate Australia from the global economic crisis, but a leading firm of financial analysts has cast doubt on this optimism.

Rachel Ziemba is a senior analyst with Roubini Global Economics, founded by the renowned economist Professor Nouriel Roubini, who foresaw the current crisis.

She argues that China’s growth is fragile and it cannot counter a collapse in demand from the West.

“The Chinese government has been very aggressive at stimulating investment but I think we’re still seeing China isn’t actually importing very much,” she said.

“It has been importing a lot of commodities, that’s helped countries like Australia and other commodity exporters.

“However, I think there are two risks: one that China might pare back its imports of commodities, given that part of its purchases were stockpiling and trying to take advantage of cheap prices, cheaper prices than in 2008 for example.

“But the other is that China is still a very small part of the global economy; a growing part but Chinese demand can’t compensate for the very weak demand we’re seeing out of the US, Europe and Japan.

“We’re seeing in the US, US consumers are finally saving, but savings means that they’re not consuming as much.

“And so that means their demand for Chinese goods is falling, their demand for other goods is falling and I don’t think the Chinese consumer is yet ready to pick up that slack.” Read more here

AUSTRALIAN

THE Rudd government’s fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.

The only international body to correctly predict the financial crisis – the Bank for International Settlements (BIS) – has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates.

“An extended period of stagnating economic activity could undermine the credibility of the policies in place. Governments may find it hard to place debt if market participants expect the underlying (budget) balance to remain negative for years to come,” the bank said last night.

The BIS annual report has for the past three years been warning of the dangers of a repeat of the depression. Its latest annual report warned that countries such as Australia faced the possibility of a run on the currency, which would force interest rates to rise.

“Particularly in smaller and more open economies, pressure on the currency could force central banks to follow a tighter policy than would be warranted by domestic economic conditions,” the report said.

The Swiss-based BIS, which acts as central bank to the world’s central banks, said it was “an open question” whether the stimulus policies would succeed in stabilising the economy.

“A significant risk is that the current stimulus will lead only to a temporary pick-up in growth, followed by protracted stagnation,” it said. “Moreover, a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.”

It said there would not be a sustainable recovery until major problems in both the financial system and in the real economy were tackled, and it warned that governments were a long way from dealing adequately with either.

“Governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks,” the BIS said. “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses.”

The BIS analysis shows that Australia is running the third-largest fiscal stimulus package in the advanced world, behind the US and Korea. With the lowest public debt, it also has greater scope for government spending than other countries. However, BIS warned that this provided little medium-term assurance. Read more here