Stimulation may not cut the mustard
letter published in The Australian Financial Review, 21 April 2009
Adrian Rollins suggests that Australia is "far better placed" to withstand the recession than in the early 1990s, when unemployment increased to 11 per cent ("Australia better equipped than in the early 1990s", April18). Unfortunately, his analysis appears to have overlooked several aspects.
As pointed out by former Treasury Secretary, John Stone, at the recent HR Nicholls conference, this is not a conventional recession but one in which balance sheets have become swollen with debt that will have to undergo an extensive de-leveraging process. The failure of analysts to understand this is reflected in the continued downward adjustments to forecasts. Belatedly, the Organisation for Economic Cooperation and Development and the International Monetary Fund are now recognising that "advanced economies are experiencing their sharpest declines in the post-war era" (IMF) and the "deepest recession of our life time" (OECD), with OECD growth now forecast to fall by over 4 per cent in 2009.
Does Australia's apparently better starting point mean we can escape the unemployment rates of the early 1990s? Comparing the recent very sharp reduction in Jobs Ads with what happened in that period suggests we already face a similar fall in employment and the much faster growth rates in credit and household debt than nominal GDP since 2003 indicate that, given the current outlook, there is a serious debt problem in Australia too.
On top of that the Rudd Government has adopted workplace relations and emissions trading policies that have net negative implications for business investment and employment. This is reflected in the largely unreported April Australian Chamber of Commerce and Industry survey of investor confidence, which showed inter alia that nearly 50 per cent of business owners believe the Fair Work Act will have a negative impact on employment (3 per cent thought a positive impact) and nearly 70 per cent thought the climate for investment was poor or very poor.
True, so-called stimulatory action has also been taken. But it is becoming increasingly clear that, at best, such action is having little positive effect and may even be having net adverse effects because some measures taken suggest a government in panic mode. A very major policy change is needed, designed to help make employment profitable by removing obstacles to reducing costs and focussing on encouraging business confidence across the board.
Des Moore
Director, Institute for Private Enterprise
South Yarra Vic