Global financial markets have settled after last week’s dramas but we still need to be cautious about our prospects.
THE dramatic trading on financial markets last week, and the continued debate over the state of the international economy, seems to have left many Australians feeling downcast.
A survey released last week found that almost half of Australians believe the world is on the cusp of another widespread financial crisis.
Another third say it is a 50-50 call, which leaves a pretty small minority feeling confident about the state of the world.
The survey also found that most Australians (70 per cent) believe our country has performed better than anywhere else, which is an encouraging recognition of Australia’s relatively good performance.
In light of recent developments, it was interesting this week to read Treasurer Wayne Swan’s ministerial statement on the global economy.
Mr Swan is not exactly an impartial observer – along with Prime Minister Julia Gillard and Reserve Bank governor Glenn Stevens, he has the most sway over Australia’s economic prospects.
That’s why it is important to scrutinise his speech – to see if his views are rooted in reality, or if the country is, well, you know...
Mr Swan was candid about some of the big issues facing the global economy, in particular the wide divide between Europe’s ‘pigs’ – the struggling economies of Portugal, Ireland (and Italy), Greece and Spain – and the stronger economies of northern Europe, notably Germany.
In the latest move, the European Central Bank recently started buying Spanish and Italian government bonds to prop up their ailing currencies.
But, as Mr Swan said, further decisive action is needed.
“The EU is at a critical point in its history. The political courage and vision displayed by its founders is needed today, more than ever,” he said.
For a politician, that’s fairly strong language. Code for saying the EU is close to breaking point.
Mr Swan also noted that recent moves in the US – to raise the debt ceiling and cut US government spending to avoid a default by the US government – is only a first step to fiscal sustainability.
The positive part of Mr Swan’s ministerial statement was the ‘four core strengths’ he says put Australia ahead of the pack.
The first of these is Australia’s fiscal strength. He correctly pointed out that Australia has lower government debt than most other advanced economies, and a plan (albeit a bit wobbly) to get back to a budget surplus in 2012-13.
The ratings agencies agree with that assessment. Australia is one of only 14 major countries in the world to hold a AAA-rating by Standard and Poor’s.
Mr Swan also highlighted the strength of Australia’s banking system.
Recent profit reports by the major banks have illustrated their strong position, in terms of both cash earnings and their balance sheets.
A third factor highlighted by the treasurer was the continuing strength of the Asian region, with Australia located “in the right part of the world at the right time”.
He pointed out that exports to China and India, two of the world’s fastest growing economies, are almost double those to the US and Europe.
So far so good – the arguments put forward by Mr Swan accord with the views of most economists.
But his fourth reason was much more questionable.
“Because of the actions we took during the global financial crisis, we face this renewed global turmoil with low unemployment and more people in jobs,” he claimed.
This is partly true – the extra government spending after the GFC did bolster parts of the economy.
But it was a transitory boost, delivered in a very wasteful manner, and left the country with a larger public debt than needed.
With the benefit of hindsight, it’s clear that a large fiscal boost was warranted but not of the scale or type that Canberra delivered.
Speaking of fiscal policy, what about the ‘tax’ side of the equation.
Mr Swan is determined to proceed with a mining tax and a carbon tax, which will do nothing to help business in this country.
A more thorough analysis of Australia’s prospects would have included this topic, just as the planned tax summit should also discuss the two largest tax changes planned by the federal government.