Many people believe that cutting a government’s fiscal deficit leads to increased confidence and higher growth. The evidence, however, is not terribly convincing.
At its board meeting two weeks ago, the Reserve Bank of Australia cut the “cash rate”, the rate it charges to lend to the banks, from 2.5% to 2.25%. They took this step because the evidence was that economic conditions were deteriorating so rapidly that even the risk of a house price boom was preferable to inactivity on the interest rate front and the resulting intensifying economic slowdown.
In Greece, an old-fashioned socialist political party, Syriza, has been elected to the Greek government, almost winning a majority in its own right. The second largest party is a neo-Nazi party called (in English) ‘Golden Dawn’; the centrist parties have been decimated. In Spain, ‘Podemos’ (‘We can’), another party opposed to austerity and intending to ask for some debt forgiveness, would win an election if it were held now.
Stock market soothsayers will tell you that “bull markets climb a wall of worry”. What they mean by this is that great optimism is not conducive to big rises in the market. The more optimistic commentators and market participants are, the more likely it is that “everything is in the price”, in other words because the optimism is fully reflected in share prices, there’s nothing left to drive the market higher.
What happens in the world economy matters to Australia. World growth is a key driver of commodity prices, and most of Australia’s exports are commodities. The top three commodities, coal, iron ore and gold, account for 45% of our exports. Over the next few years LPG/LNG will become very important too. Gas price contracts are often linked to the oil price, so falling oil prices affect us too.
We have been warning for some months now that economic growth in Australia was likely to slow sharply. The latest national accounts data confirm that this slowdown has begun. GDP rose at just 0.4% in Q3 in real (inflation-adjusted) terms, or 1.6% annualised, way below the long term average (since 1960) of 3.5% per annum. Real domestic demand, or GDE, rose just 0.1% in Q3, or 0.4% annualised. Over the last 54 years, real GDE has grown at an average rate of 3.6% per annum.
