Is the recession really over?

July 26, 2009

On July 21, Access Economics released its forecasts for the Australian economy. It predicted Australia was through the worst of the recession.

While saying unemployment would continue to rise, Access argued that it will peak at 7.5% in Australia — significantly below the 10% or higher predicted for the US, Europe and Japan.

Access director Chris Richardson told ABC radio's AM program on July 21 that the optimistic forecasts were based on three things. "We had big and early cuts to interest rates, we had big and early stimulus packages and China is doing very well," he said.

China is "arguably doing unsustainably well, the amount that it's buying at the moment off the back of very cheap credit, the amount that it's buying of coal and iron ore simply can't keep up at the current pace".

Of the three factors that Richardson mentions, the Chinese economy's apparently remarkable growth — estimated at 7.9% for the April to June quarter – is the most important. It's also, as he admits, the least predictable.

A China-led recovery?

In the first three months of 2009, Australia exported more than 60,000 kilotonnes (kt) of iron ore to China. This made up about 77% of total iron exports in the quarter, according to the Australian Mineral Statistics Report for March 2009, compiled by the Australian Bureau for Agricultural and Resource Economics. This marked an increase of over 20,000kt over the December figure: a 50% rise.

The Chinese economy's surge in demand for iron ore comes on the back of the Chinese government's US$586 billion stimulus package. Most of this package is being spent on a massive infrastructure program. A surge in demand for iron ore in particular has been the result.

However, China's continued growth is not guaranteed. The capitalist success of China's economy has been founded on its export of cheap manufactured items to the US and European markets.

In February, Chinese exports collapsed by 26%, said Alan Kohler in on March 12. "China's trade surplus collapsed from $US39.1 billion in January to $US4.8 billion in February", he said.

A second factor troubling economists is the huge credit bubble growing in China. Chinese bank lending was up by 200% in the six months to June. The bulk of this lending is from state-owned banks. At the same time, credit is still contracting in most advanced capitalist economies.

Much of the credit is being spent speculatively, in the stock market and in property development, said Kohler on July 17. "The downside is that a bubble is developing in both shares and property: the Shanghai stock market is up 75% this year, and must surely be heading for a destabilising crash."

The International Monetary Fund has also cautioned those expecting a China-led recovery. In its July 8 World Economic Outlook Update, it warned "the recent acceleration in growth is likely to peter out unless there is a recovery in advanced economies".

Despite some efforts to increase domestic demand in China, the economy remains firmly geared to the export market. While consumption in the US and Europe continues to fall, longer-term prospects for growth in China remain very unstable.

What happens when China's stimulus payments are exhausted? The extraordinary growth of the Chinese economy could grind to a halt.

A slowing in China's growth would mean a fall in Australian mineral exports. These "green shoots" could quickly wither.

Australian recession

Richardson also pinned his prediction of better times for the Australian economy on the fact that consumer spending is continuing to rise. Total retail sales rose by 1% in May, the Australian Bureau of Statistics said on July 1. Retail sales have fallen only twice in the past 12 months.

The increases come on the back of the federal government's two stimulus packages. The government paid workers, parents and pensioners lump-sum payments and exhorted them to spend. The biggest winners in May were department stores, whose turnover increased by 5.5%, the July 1 Sydney Morning Herald said.

However, economic indicators point towards more economic pain for those who can least afford it.

The "average person" has lost A$33,500 since December 2007, according to the July 16 Age. "Australian households have lost a total of $602 billion
in the five quarters since the economic crisis took hold", it said.

Self-funded retirees have been among the worst affected. Eighty seven percent of self-funded retirees have lost wealth, with almost half losing over $100,000 since the economic crisis began, according to the July 19 SMH. Many have been forced to look for work.

Official unemployment rose to only 5.8% in June (from 5.7% in May). But this figure masks the loss of full-time jobs.

Since August, full time jobs have fallen by 117,000. Over the same period, the labour force increased by 230,000.

Official unemployment has been kept in check only by the increase in part-time jobs of 136,000. The July 19 Age reported average hours worked have fallen by an hour a week to 33.6. Many workers who worked full time have been forced to accept part time hours.

The low paid have also lost out greatly. The Fair Pay Commission's decision to freeze pay levels for workers covered by a federal award means a real pay cut of at least 1.5% as inflation erodes the federal minimum wage of just $543.78.

And the situation for unemployed workers is getting worse. Australian Council of Trade Unions president Sharan Burrow told the ACTU's jobs summit on July 20: "At the beginning of January 2009 it took six months (26 weeks) to find another job on average — that's already pretty tough. But now the average length of time out of work is more than eight months (33 weeks) and growing rapidly."

A jobless 'recovery'?

The severity of the impact of the global financial crisis remains to be seen. However, after less than a year, Australian workers have been made to suffer significantly, with job losses, increased part-time work and a significant fall in individual wealth.

Access Economics' prediction that the Australian economy is through the worst of the recession is a very pointed one.

While sections of the business elite may be able to see "green shoots" based on the over-stimulated Chinese economy, or the cash bribes doled-out by the Rudd government, for the majority of workers the threat of unemployment has risen. Working people should not believe the hype.

If the current recession follows the path of the recession of the 1990s, unemployment will continue to increase for months after the official economy begins to grow again. It could be many years before (official) unemployment rates sink below 5% again.

Many businesses — most notably clothing manufacturer Pacific Brands — have
taken advantage of the cover of the recession to "restructure" operations, shed jobs and even to relocate offshore. No "recovery", no matter how strong, will return those jobs.

While trillions of dollars of toxic debt remain unaccounted for in the international financial system, while the majority of the advanced capitalist economies continue to go backwards and while the threat of a credit bubble hangs over the Chinese economy, predictions of the end of the crisis would seem wildly optimistic.

Working people need to prepare for bigger attacks to come.

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