Another long delay in posting. I have just been too busy, but I do need to post because this blog is partly my journal of record.
In a short post yesterday on my personal blog, Mr Rudd's budget deficit, I expressed some concern about the forecast size of the Australian budget deficit, setting this in the context of some of my previous views. In this post, I want to stand back a little and just muse about future economic directions.
My main reading time - I call it train reading - is travelling to or from work. Just at present much of this has been focused on local history. I am trying to make real progress on my long held dream of writing a full history of Australia's New England. This has been a personal target for a very long time, and I am beginning to feel that if I don't complete it now I never will.
In the midst of my local history I took a break to read Robert L Heilbroners' The Worldly Philosophers:The Lives, Times and Ideas of Great Economic Thinkers (Touchstone, New York, revised seventh edition, 1999). I enjoyed this book. He really writes well. But it also reminded me how much economics is a creature of its time.
One of my key points in thinking about Australian economic policy is a simple one. Australia is too small to affect the global economy in any real way. We can only mange our response to global changes. I am wondering a little if the Australian Government has this sufficiently in mind.
During the week an Australian economist, I think it was Barry Hughes but only saw the reference in passing, made the very sensible point that we should not conflate output and sales.
The savage downturn in global production means that inventories, stocks, have been falling. This could only go so far before production started to turn up to meet base demand. I think that this is now happening, hence the many references to green shoots. However, this does not mean that sales are or will increase. We may, and this is the link to Helbroner, simply move to a lower equilibrium level.
The various global stimulation measures are intended not just to ease the downturn, but also to prevent the lower equilibrium by increasing sales, thus starting a real recovery. Frankly, I am coming to fear that we would have been better off letting the downturn bite and then inflating. I say this because the size of the stimulus packages is likely to leave many Governments' greatly enfeebled. The risk is a return to the 1970s.
Since September the Australian economy has performed much as I expected, although both the loss of domestic confidence and the size of the global downturn has been greater than I expected.
I said from the beginning that the key thing that I was watching was Australia's international trading position.
Our balance of trade in goods and services went positive at just the time we needed. We needed this, among other things, to give Government greater room to move.
The value of our currency also declined as just the right time. I thought that this was silly and said so because it did not reflect the fundamentals. Still, it did help from a narrow domestic viewpoint. Since then the Oz dollar has appreciated, if more against the US dollar than the Trade Weighted Index. The second is important because it is a broader measure.
The balance of trade in goods and services for March actually showed a further strengthening.
I was trying to explain to a friend why this was important. Like the US, Australia was living above its means. This was reflected in low savings and a deficit on the current account.
You can see this in the attached graph from the Australian Bureau of Statistics. back in 2007 we were in deep deficit. Had this continued, the adjustment impact of the downturn on Australia would have been very harsh.
The change in performance since then has been quite remarkable. Yes, the mineral boom helped, and we are being affected as existing contracts near their end. But we still have a real buffer.
We have in fact done a fair bit better than I expected. One of my concerns was that Government stimulus measures would spin over into deficit on the trade account. So far we have avoided this, in part because of an increase on exports of agricultural products. In global terms, this is a very good performance.
Now look at the next graph. This shows volume retail sales expressed in trend terms on a quarterly basis. Remarkable, isn't it, given the global downturn? You wouldn't know from this graph that Australia was in quite a deep downturn. You can see why I was worried about the trade figures in the context of the stimulus measures.
I have an absolutely dreadful forecasting. Based on savings rates and asset prices I forecast the latest downturn two years before it happened! Still, what can we say?
My feeling is that the global recession is bottoming because of the production/inventory cycle. So we are then going to see an up-tick in purchases and production. What happens then depends upon other things.
There is a fair bit of surplus capacity around, so this upturn will not immediately translate into sustained growth. However, there is a lot of Government capital spend starting to come on line. This will push demand.
This is where my thinking gets very unclear. I need to think some more!