Economic clouds gather

It is a little while since I have commented on the economic outlook, in part because I have been focused on other things, in part because of a lack of clarity in my own thinking.

Looking back at my own writing on the GFC, the thing that I underestimated was the extent to which Governments would use direct short term stimulatory measures. Consequently, I overestimated the longer term impact on the investment side. I also failed to take into account the inherent weaknesses in the Euro.

Discussions at the G20 Finance Ministers' meeting focused on the need for fiscal consolidation. This means reduced spending, tighter budgets. Of itself, this will place downward pressure on global economic activity. However, there is more to it than this.

Countries such as Greece, or Australia for that matter, with trade deficits have to fund them through capital imports. Should that capital cease to be available, then either exports have to rise, imports fall, or some combination of the two. In the Australian case with a floating exchange rate, a falling dollar acts as an adjustment mechanism, cushioning the domestic economic impact. Euro countries such as Spain do not have that option.

Any fall in trade deficits in one country has to be balanced by an increase in the trade deficit or a reduced trade surplus in another country. During periods of economic expansion when world trade as a whole is growing, individual country adjustment is obviously easier. Just at present we have the apparent combination of a G20 contractionary  approach with the need for some economies to address their trade positions. This is a recipe for pain.

Australia's economic performance depends heavily upon commodity exports. My view had been that the longer lead time investment components in the various global stimulus packages would support those exports, leading to something of a boom as ordinary economic growth recovered. I no longer hold that view.

I am not an economic forecaster, nor do I have the detailed knowledge of, for example, the Chinese economy possessed by many economic commentators. I just find it hard to be so sanguine about prospects at a time when the economic negatives are so evident.

So, just as I was more positive when the global financial crisis hit, now I am more cautious than many including the Australian Treasury about Australia's prospects. To check this, it is time to return my focus to economics.