KEY POINTS:
The Australian economy, like all economies, is a creature of confidence. But talk, unlike credit, is cheap.
Continued media assertions of market stability in the face of the credit crisis with terms like 'insulated' , 'recession-proof' or 'resilient' are quietly being shadowed by concerns these words disguise denial.
Anchored in the Australian psyche is a deep rooted and essential self-belief that carries the nation far.
But cracks in confidence are beginning to show.
In today's Sydney Morning Herald Michael Pascoe raises serious doubt about the big four Aussie banks in the way their ebuillent CEO's frame their pre-tax dividends, and yesterday, the same newspaper raised other doubts about the robustness of Macquarie's confident profit announcement. That article hinted at the veracity of Macquarie's posturing.
Last Wednesday Australian Treasury Secretary, Ken Henry, listed eight factors that he said should help buffer Australia against the global recession.
It is worth recounting them:
First was strong company profits. Second was Australia's low unemployment rate of 4.3 per cent. Third was the healthy order books in investments in engineering, construction and natural resources. Fourth was promising stimulus in the federal budget. Fifth was the 20 per cent fall in the value of the dollar against trading partners' currencies. Sixth was the fall in the price of petrol. Seventh was the a number of large global countries announcing their own fiscal stimulus packages. Eighth was the Reserve Bank's dramatic cuts to official interest rates.
It's the Treasurer's job to be accurate and there's growing concern Australia is in denial. Henry's 8 points are a mixed bag. Strong company profits and unemployment figures are only indicators of yesterday. Mining and resources are experiencing serious price fluctuations. The price of iron ore was revised down 40 per cent last week and mining companies are increasingly jittery about sales.
The debt-heavy US car industry is wobbly and China has cut orders to actively insulate itself from the long term impact of global recession.
Henry's references to stimulus from the Federal budget depends on the Government coffers. The price of petrol is irrelevant as a long term indicator of stability and confidence as demonstrated by its wild variety.
Most concerning of all is Henry's deduction that confidence is evinced by big countries providing their own stimulus packages. This overlooks why they need to do so.
Of Henry's comments suggesting indicators of confidence, only the (variable) Australian dollar and interest rates controls are highly relevant.
Importantly, Australia faces a threat to its property dream.
The Howard Government built years of success on stimulating the building industry and encouraging first home owners to leap into the housing market assisted directly by such things as the $10,000 one-off 'first home buyers' grant.
Add to that the perception of consistent and providential rises in property values and the apparent panacea of 'negative gearing' (heard that term lately?) and the market was irresistible to young first time home owners.
The simple question is, in a recession with property prices trending downward, can these owners pay the mortgage? The bottom line is a recession will affect the ability of highly indebted mortgagees to pay and the flow on to the building industry and consumer goods is clear.
Australia's economy is exposed to the flow on impact of the credit bust in the US if not the brunt of the problem itself. Australia is a big economy linked closely to the US and it is hard to see how it cannot take a hit like all others will.
The trillion dollars in Australian super fund investments must have major exposure.
At the heart of the American crisis is over valued, over 'securitised' mortgages and credit default swaps and derivatives, managed by an excess-driven poorly regulated financial services industry.
In Australia's financial services infrastructure the problem of regulation and oversight is similar as evinced by the fall of Rubicon recently.
Nonetheless, there's no denying the long term fundamentals for Australia such as natural resources revenues are good. It was right for the Treasury Secretary to speak of confidence but delusional not to speak equally gravely about caution.
* Simon Arcus is a solicitor who has lived in Sydney and Auckland
