18 Nov. 2009

Recession-proof?

Notwithstanding the strenuousness of the technical definition of recession – such that the economy has to keep contracting for multiple quarters, and actually has to contract at that, whereas Ross Gittins points out very low levels of growth will look and feel like a recession – Australia seems to have dodged the recession bullet.

Well, part of this is clearly due to the stimulus package, which meant that the public purse took the hit for the team. But it wasn't Rudd or Swan's fiscal genius that meant that the Australian stimulus prevented recession whereas the American or British ones didn't – something else is going on. Basically, the Australian economy is – no surprises – different from those of Britain or America: less dependent on the financial services sector, more reliant on primary production.

The big surprise to me is that the demand for Australian primary goods hasn't collapsed. That is, that the demand for primary goods hasn't collapsed full stop. Why hasn't this happened? The answer is that Asian demand hasn't collapsed, because Asia's not in recession, and that's where all the coal and shit is going to.

Why hasn't Asian demand collapsed, though? Asian growth has been fuelled by exporting to First World countries, where the economy is in serious trouble.

Has demand for Asian goods outside Asia fallen? Yes, I think so, but not by that much: Asia makes what is cheap, so what is likely to still be bought in the bad times, and the stimulus packages have stimulated purchases of Asian-made goods. Retail spending is resilient in Britain, for example, and this has been ensured by public policy. Moreover, we have the Asian version of the stimulus, the reorientation of the Chinese economy towards domestic consumption.

Well, now what? Is everything going to be fine? I still can't help waiting for the other shoe to drop. The great flaw in the world economic system it seemed to me was that Asia was producing for markets who couldn't afford to buy, and were buying on massive credit lines extended, effectively, by Asia. This is precisely what precipitated the crisis, because the credit stretched to breaking point. Now some of the credit's been nationalised and everyone's trying to get back to business as usual, i.e. running up enormous amounts of credit and importing Chinese plasticware. I can't see this ending well: indeed, what I expect to happen is an almighty crash, again, and at some point there is going to be no restarting the credit-bubble-economy.

Australia is not immune: it runs a substantial current account deficit, if not as substantial, and is also (therefore) a credit-bubble economy, if not to the same extent as other parts of the Anglosphere.