25/06/2013 - 08:32

Analysis: economic and political paralysis

25/06/2013 - 08:32

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Analysis: economic and political paralysis

During a previous economic downturn a Sydney-based banker asked of Western Australia: “has everyone stopped eating over there?”

We hadn’t, obviously, but we had certainly stopped spending.

What’s happened in the past is happening again, with WA consumers putting a stop on all but essential purchases.

Job losses in the resources sector and the service industries that rely on mining and oil projects is one reason for the collapse in confidence that can almost be felt in shopping centres, cafes and restaurants.

It will get better; it always does. But the next few months will be difficult for new arrivals in WA because riding the rollercoaster of a boom-and-bust economy isn’t easy.

Negative international economic events, which are far more important to WA than the rest of Australia, are almost certainly being compounded by the political paralysis gripping the federal government.

The next 80 days will bring little relief for local business as the country marches towards its September 14 election, which appears to have been decided months ago (with the only unknown being who will lead the Labor Party before and after the poll).

Not much new can be said about domestic political issues. They are all linked to the problems of a hung parliament and the aftermath of the dumping three years ago of Kevin Rudd, and his possible return as leader.

Interesting as the Labor Party’s civil war might be, the reality for everyone in WA is that we are merely observers of events in the east.

The real game for us is overseas because that’s where we do business; and right now there are four grand experiments under way, each with the potential to either prolong the never-ending GFC – or end it.

Not knowing the outcome of what’s happening in China, Europe, the US and Japan is the gravest issue for WA, a trading state that lives and dies on the strength of international demand for the commodities it exports.

A credit squeeze is gripping China’s banks as a newly appointed leadership group stamps its authority on the business community, demanding that banks rein-in loose lending, including an end to the dubious practice of using commodities such as copper to underpin loans to the over-heated property sector.

The Chinese bank crackdown has forced short-term interest rates sharply higher and driven the price of copper, and most other industrial metals, to multi-year lows – damaging WA’s mining industry in the process.

In Europe, there is no sign of an end to that region’s depression (it is no longer a recession), with soaring unemployment starting to generate political events that risk tumbling out of control as they did after the Great Depression of the 1930s.

 Plans in the US to start shifting the country away from artificial monetary stimulus has created financial turmoil as investors in government bonds (and other safe havens such as gold) rush for the exits producing fears of a bond market collapse.

The effect on WA has been immediate, with most commodity prices, other than iron ore, falling sharply and predictions the problems in China will combine with the US-led commodity sell-off to affect the iron ore price.

In Japan there is an even bigger financial experiment under way, as that country tries to end 20 years of stagnation by massive monetary and regulatory stimulation designed to create inflation in a country gripped by deflation.

For most Australians these overseas events are far from day-to-day thinking, thanks to the mesmerising effect of the ego-struggle between an immoveable Julia Gillard and an irresistible Mr Rudd.

It’s different in WA, and always has been, because our future lies less with the east of the country than it does with our international trading partners.

The problem is that those trading partners are going through a tumultuous period of change at the same time as Australia is lurching towards its own uncertain future.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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