Economists seem to be remembered and rewarded for predicting recessions. Nouriel Roubini made his reputation as one of few who cogently explained why the world would enter the deepest global recession since the Great Depression, triggered, as it was, by the global financial crisis.
During the boom preceding the GFC, the great herd of economists reported that everything was fine, that the bonanza would go on indefinitely. That's what booms do – they breed herds of economic optimists. Similarly, recessions breed pessimists. The herd is wary of the fiscal cliff in the US. It frets about a slowing Chinese economy. And it worries that economic disease in Europe will infect the rest of the world.
Let's break away from the security of the herd and seek a different vantage point from which to view the global economic landscape.
In the US, the Obama administration won such a sweeping victory the Republicans cannot legitimately claim they have a mandate for obstruction. In particular, the Tea Party wing of the party was soundly rejected by the American people. More moderate Republicans are working with the President to avoid the fiscal cliff as they negotiate a package of taxation and spending that will avert a US recession while paring back the deficit.
An agreement by year's end would provide a big boost in confidence to the business community, with businesses, small and large, beginning in earnest to hire again. That, too, could lift consumer confidence and the US economy would begin to roll.
China's interest is in a strong US economy. Its new leadership team has been unveiled and will be in place in March. In a year of transition and inflation containment, China's economic growth is expected to slow to about 7.75 per cent in 2012. The new leadership will be inclined to secure a higher growth path of 8 per cent or more as it continues to spread the benefits of growth from coastal areas to the country's west. Just this week, news came through of a pick-up in Chinese manufacturing activity, with the index reaching a 13-month high.
Europe will not be a source of global growth for years to come, but it may not be the drag on growth that it has been since the global recession. Recent announcements by the European Central Bank have helped calm fears and are providing some necessary breathing space for governments to implement broader structural reforms.
Putting these developments together, it is possible to see, from the vantage point away from the herd, a return of the global economy to around trend growth of 3.5 per cent to 4 per cent.
Of course, there are risks that things may not turn out this way.
The herd will remind us the US congress may remain gridlocked over the budget, growth in China may remain weaker and Europe may melt down. But the herd is mulling those possibilities and the breakaway group need not dwell on them.
What could this stronger global economy mean for Australia? We are actually well-positioned to benefit from it. Our fiscal position is strong and government debt is but one-tenth that of the big advanced economies. Australia is one of only a few countries rated AAA and stable by all three international ratings agencies.
Unemployment is low by historical standards. Inflation is contained, the carbon price hasn't wiped out Whyalla or any other community – its actual price effects are as predicted by Treasury – consumer confidence has reached its highest level in 19 months and house prices have begun to edge higher.
As the mining investment boom approaches its peak, growth from this source is likely to be replaced by other sources such as non-mining investment and greater export earnings.
And households may be nearing completion of the task of winding back their indebtedness to more comfortable levels. Households on average are saving 10 per cent of their incomes compared with zero before the GFC. While this savings effort is good for households and the nation, it helps explain why people feel cost-of-living pressure despite a low official inflation rate.
Whereas before they spent $100 to buy every $100 worth of goods, now they have only $90 available to buy the same $100 bundle of goods, as they wind down their credit card debt, save for a deposit on a home or sock away $10 in general savings.
If the global economy recovers next year, as appears likely from this more optimistic vantage point away from the herd, the Australian economy's growth rate may be much the same next year as this, but it may well feel better for everyday Australians.
They will share more fully in economic growth and will wonder what that destructive carbon tax scare campaign was all about.
- Minister Emerson's Office: (02) 6277 7420
- DFAT Media Liaison: (02) 6261 1555