I have previously discussed the ending of the mining boom and the consequent weakening of the Australian economy. The first mining boom, the price boom, laid the basis for the second, the investment boom. It was always going to be the case that the end of the first would finally end the second. It’s just happened a lot faster than was generally expected.
The Chinese economy continues to slow. Chinese economic growth has been built on the twin pillars of heavy infrastructure investment and exports. Domestic consumption has been a remarkably low percentage of the economy, remarkably low because China is still a poor country, remarkably low by global standards. This pattern has been unnatural, one enforced by Government fiat. A painful restructuring is now underway.
Germany, the economic powerhouse of Europe, is going through a related process. Germany and, to a lesser degree, France gained hugely from the Euro. Had Germany retained its own currency, it would have faced significant appreciation that would have reduced the exports on which German growth depended. The wider Euro effectively gave Germany a currency advantage in the same way the undervalued renminbi gave China a currency advantage. To a degree, the rise in debts in peripheral Euro countries was a mirror image of Germany’s trade surplus. One could not exist without the other. Europe now struggles with the restructuring consequences.
Europe’s economic woes feed into China’s problems. Now add another factor.
Anybody in business knows that debt levels can become a problem when business contracts. Loan and interest repayments that could be comfortably met become a burden. Painful restructuring or even closure may be forced upon us. This is reinforced where our main customers face similar problem. They cut, we cut, and the economy goes down, creating the need for further cuts.
Europe is going through exactly the same process, adding to collective woes. It’s very easy to become depressed.
In fact, we have been through all this before. The long growth cycle that began at the end of the Second World War seemed immutable, likely to continue for ever. Then the oil shocks, the uncontrolled rise in US spend associated with the Vietnam War, brought things to a shuddering halt. The result was a decade of slow growth while the imbalances worked their way out of the system. This, I think, is just where we are now.
What does this mean for Australia? Must we share the pervading sense of gloom? The answer is no.
We still have a strong export base. As the mining boom enters the tailings stage, the pressures it has placed on other parts of the economy and on regional infrastructure will ease, will ease. Interest rates will fall. Falling interest rates with lower export prices means a lower dollar.
Barring economic catastrophe, and this seems unlikely, lower interest rates plus a lower dollar will cushion us from at least some of the economic effects. In the longer term, this period of adjustment will position us for further growth,
Note to readers: This column appeared in the September/October edition of Australian Business Solutions magazine. It's not on-line, so I have re-published it here.