Australia: are there positive economic threads in the current global gloom?

I was going to write something on the Australian Government’s new industry and innovation statement, setting in an historical context. However, to do that I need to access some of my previous writing, so that will have to go onto hold at least until the weekend.

This time last year I was preparing my annual economic outlook. I am not a super forecaster. I got some things more or less right, right some things more or less wrong. The best think that can be said is that I was broadly right. Australia’s economic performance was better than many forecast at the time, not quite as good as I had expected.

This year, I’m finding the same process far harder. The global strategic situation is far more complex. Ukraine, the Islamic State and Ebola really complicate things. The potential economic costs of Ebola should not be underestimated. It’s not just the West African countries most directly affected. The ripples are spreading far and wide.

The late Tom Clancy’s Executive Orders featured a terrorist attack on the United States using an aerosol version of Ebola, thus combining two current fears. I am not being alarmist. Unlike plague ridden Europe when  perhaps half the population was wiped out, we have the infrastructure and skills to ultimately control the spread of the disease. But you can see from the ripple effects as the disease reaches the US and Europe just how it may affect and slow the patterns of life.

Then, too, we have issues associated with the wind back of quantitative easing. In an earlier post, I wondered because I couldn’t see a clear path here. As QE comes to an end in the US, the value of the US dollar relative to other currencies has risen, placing pressure on the US economy. That was always going to happen. That was part of the reason why I saw the Ozzie falling. But I’m not sure that people realised that QE in Europe and Japan would, inevitably, depress the value of the euro and yen. At the same time, inflation in those areas has remained stubbornly low, economic activity has not picked up.

Here in Australia, Reserve Bank Deputy Governor Guy Debelle is warning that markets may be heading for a "violent sell-off".  The Australian financial press has flicked, as it so often does, to fundamentally negative reporting. We all risk ruin. So lets look at some basics.

House and share prices arguably got out of control in the soft money era. They are likely to come back and affect individual Australian wealth. With global slowdown, there will be (are) softer prices for Australia’s main commodities. Economic activity is likely to slow.  The Feds and states will experience revenue short falls, rising payments. So what?

As I said, I haven't worked through the issues. but I don’t share the gloom. Australia is remarkably well positioned to ride through another economic downturn so long as we can get rid of the presently negative present. I will pursue the reasons for that view in another post.