Get our own house in order

The European sovereign debt crisis has continued to rattle global markets and there are worrying signs that it is spreading to other parts of the world including Asia.

This has direct implications for Australia, as Asian demand for our resources was a major factor in cushioning the domestic economy from the full impact of the global financial crisis.

The European Union is one of China’s key export markets and analysts have been watching for signs that the debt crisis is impacting on the Chinese economy.

Recent analyses have revealed worrying signs that China’s economy may be slowing faster than anticipated.

There are concerns relating to the level of lending from China’s banks and claims that there has been a significant contraction in new loans.

Media reports suggest that approximately 10 billion yuan was written in new loans in the first two weeks of May from two of the four largest State-owned banks in China.

This compares to new loans of 1.1 trillion yuan in March and more than 680 billion yuan in April.

Clearly there is a need to be cautious, for the time frame is too short to make definitive judgements about demand for new loans in China, however if this pattern persisted it represents a worrying development.

A rapid decline in new lending could be a further drag on an economy that some analysts believe is heading towards a more significant slow down.

Another factor in the decline of new loans is a reported and parallel decline in new bank deposits.

A strategic analyst's report pointed out that the Chinese government has used loans as a vehicle for promoting economic growth and that a serious and sustained decline in demand for new loans will challenge the government to find other ways to stimulate economic activity.

Some steel mills in China have deferred shipments of iron ore, obviously reflecting a declining demand for steel.

This could indicate a slowing in activity within the building and construction sectors or that there is a slowing of infrastructure development within China, or both.

There is clear pressure on prices, with some Chinese buyers reportedly attempting to avoid contractual obligations and buying iron ore for example from the spot market.

These developments are presumably what inspired BHP chairman Jac Nasser to warn recently that the halcyon days of high iron prices driven by China’s seemingly insatiable demand are coming to an end.

Meanwhile reports from the United States raise concerns about a recession emanating from a number of fiscal crunches in the final quarter of 2012.

Some analysts believe that the US is approaching a "fiscal cliff" due to tax increases and spending cuts that will kick in automatically unless Congress and the President reach agreement.

A Republican-dominated Congress could well refuse an agreement with Democrat President Obama in a Presidential election year.

This means the measures that are predicted to trigger a recession could occur in the midst of institutional gridlock and acrimony about spending cuts and government debt.

According to the influential Congressional Budget Office, the US economy would fall into immediate recession in the first half of 2013 if no action is agreed by the government.

The United States is the second key market for China’s exports and a US recession could be a double whammy for China’s economy, which is already showing signs of weakness.

This would naturally flow to demand for Australia’s resources and impact on employment and further development in this country.

Meanwhile, political developments in Europe are doing little to calm nervous markets around the world.

The elections in Greece produced a result where no government can be formed and Greece is heading back to the polls in weeks to see if a definitive result can be achieved.

Polls are volatile, but indicate that the far Left parties are gaining support. That has potentially dire consequences for the restructuring and repayment of Greek sovereign debt.

The election of Francois Hollande as President of France has cast doubt on European unity in relation to the response to the debt crisis.

Concerns are now heightened for a number of banks in Spain, a country already struggling with unemployment at levels comparable to the Great Depression.

It is clear that turbulent times are ahead for the global economy.

That is why it is vital that the Australian government get its budget under control and end the spiral from zero government debt inherited by the Rudd/Gillard government to over $130 billion.

Accumulated budget deficits over the past four years total over $170 billion.

The Gillard government must get its own house in order - immediately.