The US economy has finally started a sustained recovery. After the GFC (Global Financial Crisis), the US federal government and the US Federal Reserve Bank pulled out all the stops to make sure that the financial crisis and the economic downturn didn’t turn into a rerun of the 1930s Great Depression. 
The initial “bounce” off the recession lows was reasonably strong but then slowed.
Over the last couple of years, the prices of Australia’s main commodity exports (coal and iron ore) have plunged. During the same period, however, the Australian dollar has held up surprisingly well against other currencies. Usually, over the last 30 years, when commodity prices have fallen, so has our currency, and that has helped cushion us against world recessions. That was after all one of the key reasons the A$ was floated back in the early 70s.
But what happens if the A$ doesn’t fall, even if commodity prices crash? Well, just as it used to be under fixed exchange rates, that’s a big negative for the economy. We have already seen some of the consequences of that in economic indicators which suggest that the economy is starting to slow.
Presentation to Authorised Representatives of SIRA Group on the 28th August 2014 by Chief Investment Officer Nigel Purchase:
(From G&S’s HMS Pinafore: “This is the consequence, of ill-advised asperity!”)
The GFC (Global Financial Crisis) started in 2008 in collateralised mortgages in the US, but it spread globally. Policy initiatives to restore growth involved deficit spending by governments and drastic interest rate cuts by central banks (e.g., the “Fed” in the US or the RBA in Australia), which led to the beginnings of economic recovery.
But then the new Greek government announced that the previous government had fudged the national debt figures, and that the Greek national debt was much bigger than the official statistics claimed.
Consistent with a soggy economy and deteriorating labour markets, Australian wage increases continue to slow. In the June quarter, the year-on-year percentage increase was 2.6%, just matching the year-on-year change in the March quarter.
Wage inflation is now lower than it was during the GFC (2008/9) and lower than in the 2000/01 recession, and has been for over a year. And there is little chance of it reaccelerating, short term.
Yesterday’s increase in the Australian unemployment rate from 6% to 6.4%, to levels not seen for 12 years, was unexpectedly large.
It had become obvious over the last few months that the economy was struggling. In last weeks Sira Views, we mentioned our concerns that the economy would weaken and unemployment would rise over the next few months. However, the jump surprised even us.
