They say a week is a long time in politics. Well, it’s a long time in economics, too. Last Monday, I was with the Treasury Secretary looking at the impact of the decline in terms of trade on budget revenues. In short, the fall in commodity prices has seen a reversal in our terms of trade – the price of exports as a ratio of the price of imports – which has reduced our national income or, if you like, given all Australians a ‘pay cut’ (the opposite of the boost in income we were receiving when export prices were booming). The reduction of commodity prices also impacts company profits and tax revenues.
However, that was Monday. By Friday, I was at the Reserve Bank of Australia (RBA) and the view from Martin Place could be described now as ‘cautiously optimistic’. RBA analysis shows that while the global economy has taken a beating since the collapse of Lehman brothers, there are now encouraging signs that the worst may be over, and we are beginning to move into a recovery phase – albeit at a slow rate.
So how did ‘The Great Recession’ on Monday become “The Great Recovery’ by Friday? Well it didn’t, but in between the beginning and end of the week, we did have a remarkable run of good data to boost our spirits (such evidence is now better known as ‘green shoots’ after US Federal Reserve Chairman Ben Bernanke used the term to describe a positive run of data showing signs of a possible recovery).
Firstly, there was good news from China, where the economic growth numbers showed that the Chinese stimulus package was taking hold, particularly in the second and third tier cities in the west. It should be emphasised that well before the collapse of Lehman Brothers, industrial production in China had fallen and Beijing was attempting to move China away from its dependence on exports, towards domestic consumption and investment.
Secondly, Australia’s trade numbers were strong. We achieved the second highest surplus on record, at $2.5 billion, with exports holding up and imports falling. Remarkably, Australian export volumes were relatively unscathed, at a time when global trade is collapsing around the world – and particularly in East Asia. The marked decline in the exports of capital goods, consumer durables and electronics that have been harming Asia’s manufacturing giants have not been replicated in Australia. Perhaps our alleged ‘old economy’ export structure – sometimes termed ‘China’s quarry and Japan’s beach’ – may have been a blessing during the Global Financial Crisis (GFC), as mining and rural export volumes have held up better than expected.
Thirdly, we received unexpectedly strong news in terms of retail sales and, most importantly, in the labour market. Against all expectations, employment grew by 27,300 in April (with a strong 49,100 gain in full-time jobs), leaving us with an unemployment rate of 5.4 percent – well below market expectations. While monthly labour market data is notoriously volatile, the result did take old hands in the markets by surprise.
Finally, in a little reported speech to the Australian Business Economists (ABE), the head of the San Francisco Federal Reserve, Dr Janet Yellen, gave an upbeat assessment of the US economy and the implications for the global economy. Dr Yellen suggested that while it may be too early to tell if the US economy “is reaching an inflection point”, she did give grounds that could form “some basis for optimism”. Importantly, she thought that the Lehmans collapse brought things on, earlier than expected but also invited an aggressive policy stance and perhaps an earlier recovery (albeit a slower one) than was at first expected. Dr Yellen also viewed deflation as being a bigger downside risk to the recovery than renewed inflation.
So are we seeing the first signs of The Great Recovery? As my colleagues in Latin America say in Spanish: “Con Calma,” which translated into English is: “Easy Tiger.” Despite the good signs, there is still a long way to go, with plenty of shocks that could still affect recovery. For example, another Lehmans could happen in the financial sector, or we could be affected by unexpected ‘Factor X’ outside economics (for example, look at the market response to the recent Swine flu outbreak in Mexico).
It could be that the US sub-prime housing issue that resulted in the collapse of Lehmans Brothers brought a sufficient shock to the financial system to cause a global investment slump – with severe consequences for the demand for capital goods and consumer durables. It could well be that now the world has adjusted to that shock and investment will return, with the fiscal stimulus packages filling the gap in the meantime. One thing will do know is that there will be different attitudes to debt and conspicuous consumption in the future, particularly in the US economy as the world recovers, albeit at a slow pace. The days of large consumption fuelled by household debt – as depicted in the TV series ‘Mad Men’ about Madison Avenue advertising agencies – are probably over and we may well see a more cautious and sober response by households during the next recovery.
So where does that leave us? They used to say “Where were you when JFK was shot?” Or, a bit more recently, “Where were you when Cathy Freeman won her gold medal?” In economics, it’s a bit more cumulative than that – there’s usually no one single event. That’s why economic analysts look for turning points in the data and psychological breakthroughs. Hence, we’ve seen all the talk of “green shoots” recently after a good run of economic data and a recovering equity market. In twelve months we may look back on the week as either a mirage of good data or maybe as the time when we saw the first signs of The Great Recovery.
Tim Harcourt is Chief Economist of the Australian Trade Commission (Austrade) and the author of THE AIRPORT ECONOMIST www.theairporteconomist.com