One entry last November I remember making, which was rolled into one of my columns, was that the consensus of economists in the US saw a second-half of 2009 economic recovery. That currently looks to be happening.
Meanwhile, our unemployment rate seems stuck at 5.8 per cent, a long way from 10 per cent, but as economists downgrade their once scary jobless rate predictions, I have George W. Bush nightmares to deal with. And this makes me warn: Don’t declare victory too soon!
I will never forget the images of George W, aboard the USS Abraham Lincoln, in bomber jacket and declaring: “Mission accomplished”. That was 2003 and he was talking about the Iraq mess that still looks a long way from completed.
I think declaring victory over the economic downturn is a little premature, despite the fact I was in the forefront arguing that this won’t be as bad as most economists and media commentators were predicting.
Even though the 5.8 per cent jobless rate looks becalmed at this level, Rory Robertson, the interest rate hotshot from Macquarie, points out that we have lost some 222,000 jobs in 13 months. The unemployment rate has gone from 3.9 per cent to 5.8 per cent in that time and that’s a 1.9 per cent rise. Lots of people have been shifted to part-time or reduced-hours work and that will impact on spending in the future.
Also, when interest rates rise this will spook people and I expect we will grow nicely but not brilliantly. History shows that unemployment can take time to turn around and head down.
A debt bubble caused this problem and we have used government debt to shore up confidence and get the global economy working again but it will take a few years before we get back to a more normal footing.
We could see government borrowing forcing up inflation and interest rates in coming years and this will hold back lots of investment and keep growth that creates jobs to lower-than-average levels.
Don’t get me wrong, we have not dodged a bullet, we have diffused a nuclear bomb! However, there is an adjustment process ahead and that’s why I think the Prime Minister’s warning about “not being out of the woods” is appropriate. I think stimulus should continue and the Reserve Bank should hold fire on interest rate rises.
Robertson says the October rise is ruled out and a November one is only 50-50. He thinks a rise this year will rest on how good the economic news is.
Cautious banker prevails
Last week I had the pleasure of catching up with the old boss of the CBA, David Murray, who is now the chairman of the Future Fund. David gave me the best assessment of what would happen to credit markets and he gave it to me before Lehman Brothers collapsed. He liked fixed interest investments and he got that call right too. He is still not excessively optimistic. In fact, the cautious banker still prevails.
Since the GFC, I made big calls and hoped I was right. With my current caution about being too optimistic, I hope I end up being wrong.
(For bears who need a pep talk, Steve Keen will be on my SWITZER program on Sky News Business Channel on Tuesday night.)
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