The global economy is on a knife edge. Global growth and inflation might accelerate as US households regain their spending mojo in response to rising wages and house prices. Alternatively, global growth might continue its downward trend of the last three years, eventually plunging the world into a deflationary crisis when investors head for the exit en masse. Or, the global economy might stagger on with tepid growth and near zero inflation for some time yet.
Nobody knows which way it will fall. But Australia needs to hope for the best and prepare for the worst. It is a little like preparing for global warming – Australia can do its part to prevent a crisis but we are captive to the actions of larger players. Unlike a climate disaster, however, a financial crisis could arrive very suddenly, so the time to get ready is now.
The lessons from the economic crisis of 2007-2009 are important here. After Lehman Brothers collapsed in September 2008 the Rudd Government quite sensibly turned to fiscal stimulus of the economy. But without a set of projects that were ready to go, the stimulus programs that were undertaken ranged from ineffective to disasterous.
The $14 billion of cash handouts was a wasteful sugar hit to the economy. The pink batts program had merit in that it was labour intensive and fulfilled an important long term purpose, but the rushed and botched implementation led to four young men losing their lives. The $14 billion dollar program to improve 7000 primary schools was better, but it took time to ramp up and there are many schools that didn’t get so much for their $2 million of taxpayers’ money.
To prevent a re-run of these problems, the Federal and State Governments should be creating a long list of projects that are: ready to go at short notice; create demand for Australian labour and Australian made goods; and provide long lasting benefits.
Infrastructure Australia has prioritised a set of large infrastructure projects for eventual government funding. However, those kinds of large projects are not what is needed in an emergency stimulus package. They simply take too long to ramp up. A list of smaller, less complex projects is needed. Projects that de-bottleneck existing infrastructure, achieve environmental restoration or build public amenities are much more appropriate.
Creating such a working list is more easily said than done. There are the twin political problems of pork barrelling in the creation of the list, and then the belief among constituents that any project put on the list has been implicitly promised to them whether a crisis arrives or not. Nonetheless, Treasury and Finance departments at the state and federal levels need to compile the list as a matter of urgency.
Another lesson from GFC Mark 1 is that a global crisis can create opportunities as well challenges. Immigration comes to mind here. In the period 2008 to 2011 Australia experienced a mining boom at the same time that most other developed countries experienced their deepest post-war recession. That presented an opportunity for Australia to bring highly educated, energetic, civic minded, young people to our country. Net immigration to Australia was higher by about 250,000 people than it would have been without the GFC.
Nonetheless, we missed an incredible opportunity to bring five times that number of young, skilled migrants to Australia. There are many ‘little Australia’ naysayers to immigration who would resist a surge of immigration if the opportunity arose in another crisis. That is why getting ready by preparing the ground politically is vital.
Another way in which we should be preparing for a return of the GFC is by deleveraging balance sheets. That is not happening in Australia. Of the major parts of the economy only the banking sector is reducing its leverage, under orders from its regulator APRA. Corporate and government debt are both growing as a proportion of GDP.
However, by far the most disturbing rise in leverage is in the household sector. Household debt in the US, UK and Germany peaked in 2008 and has fallen rapidly since then, which will be terrifically helpful going forward in improving consumer confidence and spending. US household debt, as a percentage of disposable income, has fallen from 138% to 108% since 2008.
Australian households, in contrast, have grown their debt from 170% to 185% of disposable income since 2008. This is the opposite of preparing for a crisis. Households borrow principally to build and buy houses. The growth in their debt mirrors the growth in Australian housing prices and both high debt and high prices are a function of low interest rates.
The RBA has been preparing for the exigency of a deep crisis by studying how it would implement quantitative easing or other unconventional monetary policies. It is reassuring to know that the RBA is on top of that issue, but it would be more reassuring if the RBA committed to no more decreases in interest rates before a crisis actually arrives.
A version of this article was originally published in the Australian Financial Review.