The economic situation: where to next?

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The economic situation: where to next?

The preoccupation of many with monthly changes in unemployment, economic growth (or contraction), share market, property and car sales, etc, probably illustrates the high degree of uncertainty and confusion about the current economic downturn. It means that we are seeing both good and bad signs simultaneously.

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The preoccupation of many with monthly changes in unemployment, economic growth (or contraction), share market, property and car sales, etc, probably illustrates the high degree of uncertainty and confusion about the current economic downturn. It means that we are seeing both good and bad signs simultaneously.
 
Some insights into what the latest economic statistics mean was provided at the 2009 Australian Workplace Conference, conducted by the Workplace Research Centre in Sydney on 7 August 2009.
 
Armageddon averted?
 
Barry Hughes, a leading economic consultant, analysed global GDP forecasts and concluded that the 'stimulus' actions of governments worldwide appears to have worked, in the sense of restoring an overall positive output to the globe. In 2008, the Manufacturing sector contracted heavily in the expectation of a severe downturn, to the extent that production levels fell well below sales.
 
In recent months, Manufacturing has picked up again to try to catch up to demand, but the Services sector has contracted, thus levelling the results and forecasts. Commodity prices are in fact now similar to what they were in 2007, although still less than in 2008. Hughes described them as 'subdued'.
 
Manufacturing is the most volatile sector and comprises 20% of global GDP. When manufacturers slashed output below sales in 2008, they met the gap by running down stocks. That phase is now ending, which provides a lot of momentum to global activity. A 5% increase in industrial production will increase global GDP by 1% as soon as inventories stop falling, but they were still falling in June–July, as illustrated by the widespread use of shorter working weeks, etc.
 
In 2010, it is certain that production will increase, but the extent of recovery will depend on sales levels, not production. Therefore, in the Australian context, indicators such as retail sales will be important to watch once the impact of the government’s stimulus packages subsides.
 
Conclusions? The global economy is not yet out of trouble, downturns are still occurring in many areas, but some key ones (such as US housing construction) appear to be stabilising. Sales will be the key to a recovery, if any.
 
Different countries, different stories
 
Apart from India, which is probably the country least affected by the Global Financial Crisis, manufacturing bases in Asia generally suffered bigger downturns than Western countries, but they have rebounded faster and some, such as Korea, have already fully recovered.
 
Hughes said that the 'Asian rebound' may result in the current recession being ultimately less severe than the last couple in the twentieth century. However, he suggested that dependence on a recovery in China is probably overrated.
 
He added that the days of annual income tax cuts in Australia are almost certainly over. Any future gains are more likely to be used to reduce budget deficits.
 
Impact of unemployment
 
Last month’s unemployment statistics in Australia resulted in some expressions of optimism, but it should be noted firstly that the unemployment rate in Australia is calculated from a monthly survey, not an actual headcount (which means that a single monthly movement should not be relied on, because it may
'correct' the following month) and secondly that unemployment is traditionally a 'lag' indicator. Therefore, it is possible for rising output and rising unemployment to co-exist. Hughes predicted that it might be late-2010 before enough economic growth emerges to stabilise world unemployment. It will probably continue to increase until then.
 
The most recent NAB business survey in Australia (June 2009) identified a rising employment level, but not enough to stop unemployment from increasing. However, this trend combined with the practice of many businesses to move employees onto shorter working hours and pay cuts/freezes make it feasible that the unemployment rate may peak at around 7%.
 
Hughes noted that earlier predictions of a 9% peak were made simply by adding 5% onto the pre-downturn unemployment rate (4%), because in previous recessions unemployment had increased by about 5%. Apart from this being an arbitrary estimate to begin with, employers have reacted differently this time, as noted in the previous paragraph.
 
Longer-term predictions
 
Looking beyond the current economic cycle, Hughes predicts that by 2030 China will have replaced the United States as the country with the highest GDP. It is currently fourth, behind Japan and Germany. However, the United States will remain 'richer' per head of population. Also by 2030, India will move into third place (currently not in the first ten). Australia is predicted to drop from fourteenth to eighteenth place.
 
A study of 'manufacturing' also needs to look at the type of manufacturing. Countries such as Korea and China have always had a strong Manufacturing sector but the nature of it is moving up-market. Instead of being dominated by textiles, an increasing portion is goods such as electronics and cars. This trend requires higher education levels from the workforce, and Korea in particular has invested heavily in this development. However, it also creates a need to pay higher wages, which can change the country’s competitive position.
 
China is now going the way of previous countries such as Japan, in that its market share of basic industrial goods is declining as Manufacturing moves up-market. Other countries such as Vietnam will fill this gap.
 
North Asia currently takes around one-half of Australia’s goods exports, but there are other significant markets and India is likely to increase substantially in importance. Hughes suggested that this situation means Australia should devote more resources to foreign language tuition.
 
Further information
 
Further information about the conference is available from the Workplace Research Centre website.
 
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