Underlying commodity strength will play its part in pulling the country through.
LIKE the rest of the world, Australia is facing the probability of a recession next year due to the global financial meltdown. But there is every reason to expect that Australia will enjoy a softer landing than will most countries.
The announcement by the Federal Government that it will guarantee 100% of bank deposits is almost certainly unnecessary, but it is probably good politics of the kind that gave us the "be alert but not alarmed" approach to terrorism.
More significant is the undertaking by President Bush over the weekend to the G20 summit in Washington: "We must work collaboratively. We take this seriously, and we want to work with you." This is belated recognition that the financial crisis is too big for the US to respond to alone. It is recognition that the US has to share centre stage in the global economy with Europe and Asia, especially China, the emerging superpower.
The key to Australia's immediate future is China. According to Bloomberg News, the deputy governor of China's central bank, Yi Gang, told the meeting of G20 officials in Washington at the weekend that China's economic growth may slow to 10% this year and 9% in 2009 from 12% last year.
China's rulers are realists. They can't afford to slow China's phenomenal growth. The population in the countryside is about 400 million and about 20 million of these people make their way from the country to the cities each year.
This explains the necessity for China to switch from "export-led" growth, which has so far sustained Chinese development, to "domestic-led" growth.
According to Bloomberg, Yi said Chinese policymakers had shifted their focus from taming inflation to sustaining economic growth as food prices have cooled, while weaker exports threaten company profits, jobs and social stability.
There is no reason why China can't make the transition. Yi said China's banking sector was "healthy" and had "ample" liquidity.
Like the other Asian countries that retained highly regulated financial systems — against the advice of the International Monetary Fund — China avoided the economic meltdown associated with the 1997 Asian financial crisis and it appears set to avoid a full-scale depression, which still may result for many countries as a result of the current financial crisis.
While the value of Australian commodity exports may flatten in 2009, the policies and forecasts for China offer no objective evidence to support a fall in commodity prices on the scale rumoured to be forecast by Treasury, which could tip Australia into a worse recession than 1990. Australia's major mining companies are more optimistic about commodity demand than is the Government.
Further, Australia's banks and other financial intermediaries are in a much stronger position to withstand a run on liquidity than are US banks. While Australia went down the deregulation path in accord with the prevailing ideology of the 1980s and '90s, Australia avoided the excesses of US banks because of the control exercised by the Reserve Bank and the fact that all non-bank intermediaries were subject to regulation.
Even so, Australia has been infected by two myths that are at the root of the financial crisis: namely that it was possible to increase financial intermediary returns without increasing risk, and competition could substantially replace regulation.
According to Melbourne academic economist John Legge, who teaches innovation and advanced finance at Chifley Business School and Swinburne University, finance is a very low value-added activity: you can take money out of one pocket and put it in another, but it is still the same amount of money. It can create the illusion of value adding by creating money, but even then, every loan in the banking system is offset by a credit. Continued…
