The economics of the Rudd Government's $A42 billion stimulus package sets out my initial analysis of the latest economic measures. I have left the small tax measures out for later analysis.
I am completely confused by the variance between some of the language and forecasts around and my own perceptions of what is happening and is likely to happen. Could I be so wrong?
To illustrate my point, take the trade side. The Government's economic forecasts suggest a deficit on the current account in 08-09 of 4 1/2% of GDP, actually a considerable improvement on the year before.
To the end of December Australian Bureau of Statistics data shows a surplus - the first for a while - in the half year to December 08 of something over $4 billion on the balance of goods and services. I haven't attempted to do the maths, but given this, these forecasts would appear to require a massive short term deterioration in Australia's trade position.
There are clear vulnerabilities on the trade side. Here the one that I am watching most closely is one rarely mentioned, our export of education services. This is, I think, our fourth largest export earner and must be counted as very exposed.
All this said, I am struggling to see how we get to a current account deficit of the projected size. If we do get to a deficit of this size, then the projection for the following year - an improved deficit at 3 3/4% of GDP - would seem suspect.
Part of my problem may lie simply in my economic rustiness. The current account includes the balance on goods and services plus the net return on investments abroad. Quite clearly, Australia's return on its overseas investments will be down, while interest and dividend payments from Australia may increase.
Is this sufficient explanation? I simply don't know.
All the discussion in the Government's latest forecast focuses on the trade side. Still, we will know quite soon who is right. Preliminary January trade figures will be released later this month. They will have to show a major deterioration if the forecasts are to be "achieved".
We have a particular problem in all this in that local commentary is being driven by short term global developments, whereas the Australian economy remains a little out of step despite the best endeavours of people to talk it down.
On the global front, there are now some scattered signs of stabilisation and indeed improvement. These may still be swept away, but I still see no reason to vary what I said last November:
Major developed countries are going to have a nasty downturn whether we like it or not. This is already flowing onto other countries including China where unemployment appears to have risen sharply as a consequence of the downturn in manufactured exports.
In some ways the global financial system is awash with liquidity. However, and putting the financial crisis itself aside for the present, this will not translate into extra activity because people (consumers and business) are reluctant to borrow unless really forced to and then banks are reluctant to lend.
Most governments are putting old fashioned pump priming measures in place intended to stimulate consumption and investment. These will take time to come into effect. Further, the initial effects will be muted because some of the initial spend is likely to flow into savings and debt reduction. People just don't want to spend when things are so uncertain.
To my mind, the big kicker will come as increased government investment spending kicks in. This will vary from country to country, but in all cases will take time. With exceptions such as China which already has projects in the pipeline, governments will have to create project pipelines. From experience, it is likely to be eighteen months before spend accelerates in most countries.
Note that I have said nothing about confidence effects. My personal view is that there may well be more shocks and that, in any event, pessimism is likely to remain dominant until things have clearly started to improve.
Pulling all this together, my best guess is that we are going to see a deepening recession in most major industrial countries over the next twelve months. I do not see how this can be avoided, although the effects are going to vary from country to country.
Beyond this point, I would expect to see progressive strengthening in global economic activity as further investment spend kicks in. This is based just on mechanical economics 101 style analysis.
I really can't see in all this just how a depression might occur in global terms, barring some total catastrophic collapse. My bigger worry is the likelihood that the combined total of Government responses will over-shoot, creating a new set of problems on the other side.
The global downturn has been a little worse than I expected, but not much. It was always going to be bad.
None of this means, by the way, that I support Mr Turnbull's position. I do not. But that's a subject for another post!