Conflicting signals on Australian economy
By Allen Myers
Where is the Australian economy headed? Different economic indicators have given differing indications in the past fortnight.
The National Australia Bank Business Survey for June found that "business conditions in the non-farm business sector deteriorated further, due to significant declines in trading conditions and profitability performance", according to the bank's chief economist, Alan Oster. "Only construction recorded an improvement in conditions in June."
In what is usually a sign of approaching slump, "Forward orders fell sharply, with sizeable falls in manufacturing, wholesaling, and recreational and personal services". Again, construction was an exception.
The NAB survey found that capacity utilisation fell "significantly" in June, and that "stocks continued to accumulate in most sectors". This would be a double whammy, indicating that businesses are reducing production, but that consumers are cutting their purchases at an even faster rate.
The bank calculates that the economy is now growing at a rate of less than 2%, after an overall rate of 3.5% in 1997-98; it expects GDP growth of around 1.75% in 1998-99. That figure implies a considerable growth in unemployment.
A week later, however, the National Institute of Economic and Industry Research announced that its leading indicator had risen 7% in July.
The NIEIR indicator, which combines a number of different economic statistics, is intended to forecast economic activity half a year ahead. Its growth in July was due mainly to a rising stock market and housing construction.
The NIEIR said it expected growth for 1997-98 to be just under 4%, and in 1998-99 to be better than the 2.8-3.0% of "most economic forecasts". While considerably more optimistic than the NAB's estimate, this would still imply stagnant or slightly worsening unemployment, since a growth rate of between 3.5 and 4.5% is generally considered necessary to prevent joblessness increasing.
The uncertainty among the Australian forecasters reflects broader uncertainty about the world economy and the impact of the crisis that is now moving through Asia. What happens in the Australian economy in the next year will be largely determined by international events, despite the Howard government's absurd claim to have "fireproofed" the domestic economy against the impact of the Asian crisis.
Japan is now in its worst recession since World War II — more than sufficient proof that the Asian "currency crisis" is about far more than exchange rates and currency speculation.
In a speech to a symposium at Kobe University in Japan on July 14, Shigemitsu Sugisaki, deputy managing director of the International Monetary Fund, admitted that there would have to be "significant downward revisions to [the IMF's] projected global growth in 1998 and 1999" compared to the fund's projections only three months earlier.
However, Sugisaki said, "The current global economic slowdown is still expected to be less severe than those following the first oil price shock or that of the early 1980s". This is based mainly on continued strength of the US and western European economies.
"It now seems inevitable", he said, "that output will contract at a double-digit rate this year in Indonesia, with substantial declines also in prospect for Korea, Thailand, and, to a lesser extent, Malaysia and Hong Kong. Growth is also slowing in China."
Sugisaki said that, despite the Japanese government's ¥12 trillion spending package, "in view of the continuing signs of weakness of aggregate demand, there now seems little scope for a withdrawal of fiscal stimulus next year". That's a polite way of predicting that the Japanese recession won't be over quickly.
With Japan and much of Asia in recession, Australian exports are likely to be hit considerably harder than has happened so far.
An increase in interest rates could multiply the impact of declining exports. The NAB says there is a 55% probability of short-term rates rising 1.5% in the next few months, and a 45% probability of rates remaining unchanged till the end of the year. The second scenario, Oster said, would mean "higher inflation and higher longer term rates during 1998-99".
In either case, unemployment is almost certain to rise unless unions mount a real campaign to preserve and increase jobs.