Australia's dirty secret

Last week’s national accounts showed Australia is very close to technical recession. The commentators agree that we’re just splitting hairs - the recession has begun. So where to from here and what role does the stimulus package have against a darkening economic sky?

There was some practical advice from the Federal Government in weekend newspaper advertisements - get your tax returns in if you haven’t already, and if you’ve changed bank account, let us know, the money is coming in April.

We’ve heard a lot from the Prime Minister about the need for speed. Pump priming the economy must happen now. The opposition should “get out of the road”.

But are there other policy reasons for the timing of the stimulus package? I suspect the answer is yes.

The National Accounts for the December quarter show a dip in GDP of 0.5 per cent. They are not great numbers - they beg the question what next?

Commodity prices are falling back to earth - they will hit the ground this April. Australia’s coal and iron ore producers are currently negotiating with China. Prices are set by contract.

Next month is crunch time.

You don’t need a crystal ball to predict the likely outcome. China produces a vast amount of coal itself (40 per cent of world overall production), many times the amount it buys from us. It has domestic capacity in coal production on a huge scale. Years of double digit growth, however, meant that demand exceeded supply, and Australia among others picked up the considerable slack.

At its peak, China was building a new coal fired power station every eight days in a country where about a billion people still don’t have power connected to their home. (As a brief aside, think about that next time someone runs the hard green line at you over a latté - governments shouldn’t spend a cent on clean coal research, everything should go to renewables. That’s fine but there’s still about a fifth of the world’s population in China who just want to turn on a light bulb and a wind farm just aint going to get it done.)

China’s booming construction sector required steel on a massive scale and Australian coking coal and iron ore (key inputs) were sold at a high price.

But the dragon too is returning to earth.

Australian negotiators know they’re going to take a hit. The standard prediction, depending on who you ask, is that the contract prices will fall between 30 (Goldman Sachs) and 50 per cent (Access Economics). That is huge: about a 3.8 per cent fall in GDP (but not terminal considering the massive hikes in price over the boom). When it happens, expect the dollar to go through the floor (probably a good thing overall) and the commentariat to hyperventilate.

In that context and with a premium on propping up confidence in the economy (both consumer and business) it may be a good idea to encourage the punters to look the other way in April and to focus on which new plasma to buy. It may also be a good idea to discourage them from buying newspapers. Although, judging by the Fairfax results, that’s happening anyway.

The government is clearly mindful of these factors. There are compelling reasons for the stimulus package and its sensible, well timed and well aimed policy - in the short term.

But a problem remains. Keating’s famous banana republic line still rings true. Australia’s economy has a structural problem. The dirty little secret was hidden from view by the booming commodity price fig leaf. We are overly reliant on digging things up and shipping them off. Then we buy back things made from the stuff we dug up. Value is added, jobs created and profits are realised off shore.

The long term trend in commodity prices before China and India started firing on all cylinders was down. The commodities boom is over. But have we wasted the money?

The Howard years saw very little investment in critical parts of the economy. We failed to build up our workforce through proper funding for education and training. We failed to invest in infrastructure and build our capacity in other areas. We woefully failed to invest in R&D. We are dangerously close to becoming a country that doesn’t make stuff -  an economy wholly reliant on the service sector (in a time of belt tightening), agriculture (in a time of drought) and mining (in a time of global recession).

The legacy of the Howard/Costello years may yet turn out to be a diminished Australia. We had all the cash in the world and totally failed to do anything useful with it.

Now let’s hope that China doesn’t come down with the severe dose of the ’flu - if that happens, we’re headed for life support.