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The Forum > Article Comments > The world economy through a crystal ball > Comments

The world economy through a crystal ball : Comments

By Saul Eslake, published 9/1/2006

Saul Eslake predicts Australia's lengthy period of growth could be ending within the next five years.

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A very interesting and timely article. While consumer spending figures have inspired some (though not alot) of confidence that the Australian public is tightening its belt, there is still far too large a preoccupation with twenty somethings mortgaging themselves to the hilt for houses they simply cannot afford.

Although Mr Eslake has advocated holding tax cuts off until post 2007, I see no reason why a complete restructuring (eg Brackets of 40%, 30%, 20%, 10%) shouldn't take place now. That way a more efficient and predictable system could be in place for further cuts when the inevitable down turn occurs.

The US has got itself into an absolute mess not only with currency manipulation in China but also in Japan and the Arab states. If Australia is to avoid the fall out once again tax cuts are only the start of reforms needed. The greatest obstacle is trying to explain to the left side of politics that the budget surplus must be protected (aside from tax cuts).
Posted by wre, Monday, 9 January 2006 12:05:06 PM
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wre,
I am a left thinker, who believes the surplus should be protected to an extent, minus tax cuts.

I believe a surplus should be retained for economic as well as social reasons, and that the constant whinging of the wealthy for tax cuts should cease.

Saul Eastlake is one of this country's most respected economists, and I am sure his prediction will be taken into consideration by any Government, of any colour.

Congratulations Saul, a most interesting and enlightening prediction.
Posted by SHONGA, Monday, 9 January 2006 1:13:23 PM
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What many 'ordinary' folks like me (until I read up) don't realize, is this.

1/ Manufacturing has become increasingly owned by foreign companies.
(our big 3 vehicle makers are all o'seas)

2/ Since John Buttons 'car policy' to rationalize the industry, and reduce the number of makers was realized, there has been large 'growth' of IT sectors related to this consolidation/rationalization.

3/ Much of the other "growth" of the 'service' sector has been connected to the large job losses and o'seas outsourcing by major corporations like banks and funds. That 'service' sector has been IT.

4/ Now that most large corporations have DONE the shift to outsourcing and IT to manage their newfound lean operating procedures, there is not much more to do, so I expect growth in those sectors to slow considerably.

5/ This leads to the difficult position where (for example) major banks (having closed so many branches) can only save more money by outsourcing MORE costly Australian wage type jobs.

6/ Pressure on their Corporate 'bottom line' and CEO's bonus performance indicators will continue fueling this slash and burn wildfire of economic destruction of the 'average working man'.

7/ Both low AND Hi skilled Australians are being replaced

8/ Political pressure to restrict o'seas outsourcing will have limited impact (though I'm always advocating it) because o'seas manufacturers will wave the 'We will re-locate' stick over the Polys.
9/ High pay will be restricted to the construction and infrastructure industries, which are already the focal point of socialist relevance challenged unions like the ElectricalTradesUnion and CFMEU.

10/ WE STILL CAN COMPETE on a world stage with well managed, government/private teamwork in value added manufacturing which utilizes our natural resources. AT A HUGE but SURVIVABLE COST..but only by looking at automation and global markets...or chinese pay packets.

The solution is NOT a "LABOR or COALITION" one..it is an AUSTRALIAN ONE.
Posted by BOAZ_David, Monday, 9 January 2006 1:34:13 PM
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Interest rates will not go up more than 1% over the next 5 years.

The government will decide when to kickstart the property market (early 2009)by incentives.

Wages will increase more than expected.

Consumer spending will tighten before (due to oil, property, rates, jobs) the property market picks up, then spending will go again after equities increase.

The Aussie dollar will move down to 60c then back up to 85c as the US faulters slightly.

We are in the eye of the storm at present, we will be picking up again within 3 years.
Posted by Realist, Monday, 9 January 2006 2:13:41 PM
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Saul, a few things really worry me about this sort of prediction;

1. Peak oil, which is likely to have dramatic consequences for our and other economies by greatly disrupting lines of transport, triggering inflation and causing general destabilisation not only economically, but of society as a whole, which is bound to stop growth dead in its tracks and which will probably manifest itself within the next five years.

2. The notion that we have had continuous economic growth for 15 years while at the same time seeing all sorts of things decline that should be supported by strong economic growth, such as our health and education systems, the gap between the rich and the poor, environmental degradation, etc, etc. One has got to ask; how real is this economic growth? What would it be like if we measured it in a different way that took into account things like the inevitable declining non-renewable resource base, a declining renewable resource base (which should just not be allowed to happen), and an ever-larger population (which we should have stabilised years ago)?

3. The notion that GDP is the all-important parameter, when surely per-capita economic turnover is what really counts. With a rapidly increasing population over the period of continuous economic growth, there has been little or no or very likely negative average per-capita economic growth, and of course it has been very unevenly distributed.

4. The notion that we go into recession the instant we stop growing.

If we measured economic growth meaningfully, we would find a very different story emerging. And if we then looked at per-capita trends over this 15 year growth period, we would see a considerable +/-steady decline.

So for me the significance of your article is lost because the interpretation of growth is fundamentally flawed to start with. This is not a personal criticism – you have previously acknowledged the significance of at least some of the points I have mentioned here. We just need to get those hard-headed reality-detached economists and politicians to do the same.
Posted by Ludwig, Monday, 9 January 2006 5:13:29 PM
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Thank you to the various posters for their comments. Since there's a 350 word limit I can't respond to every point, just a few observations.

I agree with 'wre' that comprehensive reform of the tax system, embracing lowering of rates paid for by broadening of the tax base, ie eliminating concessions and exemptions) would be highly desirable. However this is not an appropriate time for significant net tax cuts, unless funded by roughly commensurate spending reductions, and I'll leave others to argue over the desirability of those.

I agree with 'realist' that rates will not go up by much, although I will be surprised if the currency moves through as wide a range as he suggests.

'Ludwig' makes some important points. I'm increasingly inclined to accept that 'peak oil' will happen in the next few decades, but that this means that oil prices will stay high and stimulate conservation, the search for alternative energy sources, etc; and that oil supplies will decline gradually rather than abruptly.

I've previously acknowledged, as 'Ludwig' notes, that GDP is an imperfect and incomplete measure of the broader concept of 'welfare' or 'well-being'. However these kinds of discussions, at least among economists, are typically conducted in terms of measures such as GDP - which at least allows people to speak a 'common language', as it were. Likewise the standard definition of 'recession' (at least two quarters of negative GDP growth) is widely accepted (in Western countries) even if it doesn't capture every aspect of deterioration in economic performance.

Per capita GDP growth is less imperfect than GDP unadjusted for population changes as a measure of changes in living standards, and it's true we've had 8 declines in that measure since the last official recession in 1990-91, as against only two falls in GDP itself. Nonetheless, per capita real GDP has risen 41% since the last recession, and research by NATSEM (among others) casts some doubt on the (admittedly widespread) belief that the income distribution has become less equal during this period.
Posted by Saul Eslake, Monday, 9 January 2006 5:32:24 PM
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Thanks Saul

Regarding peak oil; yes the supply capability will probably decline slowly and evenly, but that doesn’t mean that prices will increase slowly and evenly. They will come in fits and bursts and you can bet your bottom dollar (literally for many) that we will not be adequately prepared for it. This jerky price-increase pattern has well and truly started. Whether or not we have actually reached global peak production is a moot point when we consider the rapidly growing demand especially in China. The demand/supply ratio is rapidly blowing out of balance and that means escalating prices…..in the very near future.

Even if it does happen smoothly, there is no way that I can see us preventing a real recession, not one defined as a short period of no growth, but one of very significant decline. No single or combination of alternative fuel sources can match oil in terms of quantity of supply or price, nor come anywhere near it. This means that productivity and economic turnover will plummet, and our way of life will drastically change.

Peak oil has got to be an economic consideration of the highest importance.

Unfortunately in speaking the common language that you refer to, many forget that GDP is such an imperfect measure. I would actually put it much more strongly – GDP is a very highly misleading measure.

The idea that the economy has to continuously grow or almost so must be challenged most seriously. Sustainability and hence stability with perhaps a small degree of growth in terms of good developments and better efficiencies has got be our goal rather than rapid continuous growth in scale of production.

“Per-capita real GDP has risen 41% since the last recession”. That’s an astonishing claim, especially with 8 declines in that period! Surely we would have a vastly improved health system along with many other improvements, vastly reduced rates of taxation or a vastly increased discrepancy between the rich and the battler, or all of the above. Where has this supposed increase gone, or is it just another example of a highly unrealistic measurement?
Posted by Ludwig, Monday, 9 January 2006 10:30:24 PM
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Cheers Saul,

Thanks for your insights. i agree entirely in your last post.

Keep up the great work.
Posted by Realist, Tuesday, 10 January 2006 10:25:08 AM
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Here here! The important point that Saul has made is that the next downturn will involve both US and China because of problems arising in both countries internally. AS well, there is the importance of US demand sustained by the unsustainable deficit that is driving the Chinese growth. I was struck by the ideological nature of the bubble bursters that you describe. In China, it's the fate of the CCP that matters, in Japan it's the 'moral fabric'. The other day I was struck by how much modern American decay seems to reminds me of Breshnev's Russia - insane optimism in the face of no one knowing how to run things anymore.

I must admit I'm dubious about the timing conveniently waiting until after the 2008 Olympics for the bubbe to burst. Since bubble bursting doesn't always require an ideological master - sometimes resources just run out. The economic impact of bird flu has been widely canvased. Anybody want to volunteer to go and kill chickens in Iraq?

The real problem that current economic thinking has - is that it's not just peak oil - it's peak everything - that we're going through. Rational economics from now on should/will be predicated upon a world of decreasing resources. It always amazes me that so many economists seem to think that the world is flat and infinite..
Posted by kyangadac, Tuesday, 10 January 2006 12:49:06 PM
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I just don’t think any US / China downturn is going to be that significant for us. Australia was intimately connected to Asian economies during the recent ‘crisis’, but it hardly affected us. It is not quite a global village yet. We can still shield ourselves to a fair extent from international downturns. But if we are to do this, we really need to get our economists to give due consideration to the health of our domestic resource base and to imports that we basically can’t survive without, and proportionally far less consideration to all the rest.

What is really important is Australia’s resource base and one big import – oil. This is the bubble that is on the verge of bursting… with vastly bigger consequences than a downturn in the US or China. Indeed, this oily bubble will burst in the US, China and every other major economy at about the same time, unless the bigger and more powerful nations become so desperate that they actually squeeze us and other little nations out of the oil market and steal our share.

It won’t be the effects of those economic downturns that drags us down, it will be the direct effect of fuel price-hikes. It won’t be the cost of fuel itself that gets most of us, it will be effect of fuel price hikes on the cost of essential goods and services, on businesses, on transport networks and food-supply lines, inflation and sudden unemployment for many.

I don’t know – I just seem to be reading much more significance into peak oil than just about any economist. I think economists are being extremely blind to an enormous and blindingly obvious threat to our economy, let alone to the very fabric of society.
Posted by Ludwig, Wednesday, 11 January 2006 10:47:20 PM
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I think that Saul is very brave to forecast anything, in today's
uncertain world. When you get it wrong, people rub your nose in that, so I tend to follow the so called global megatrends.

I see Peak oil as less of a problem short term, its more a question
of politically unstable oil. Lets face it, the West is hooked on energy, yet the risks to reliable energy supplies are huge.
Bin Laden wants to blow up Saudi pipelines, the Iranians are determined to get their bomb. Israel is determined to stop them and already has the bombs to do it, care of George and Co. So anything
could happen really. If 5-10 m barrels daily are cut from world supply, oil would soon go past 100$ a barrel.

The best that Australia can do is to acknowledge that its probable
that the proverbial sh*t will hit the fan sometime in the Middle East and be ready for it when it does.

We have alternate sources of energy that we can develop, just the research and capital investment needs to happen, which the Govt can influence by its policies. There is no shortage of super fund money to do it with.

I used to own an award winning export company, which I sold to take life easier. One of the most frustrating things I faced was seeing the amount of well meaning bureaucrats who approached me when I did not need their help, all at huge govt expense. Next thing I was lumbered with a heap of govt charges, which restricted my ability to
be competetive on a global scene.

Lets look at some of the megatrends:
Housing prices are ridiculous in Australia, they will have to come down at some point. Young people can't afford houses anymore.

The US economy can't sustain their deficit forever, something will have to happen to drastically reduce the value of the US $.

Things are so unstable in the Middle East, that something will happen eventually. So a punt on Aussie energy stocks is a pretty good bet right now...
Posted by Yabby, Thursday, 12 January 2006 3:33:52 PM
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I like jokes. This “Australia's lengthy period of growth” was eventually estimated akin a local level of unemployment – by playing digits while assuming househusbands as a non-existing pattern and excluding the pushed into work-for-dole projects from the unemployed (in official statistics) as well.

Moreover, all these predicting the “trends and policies”, milking state's coffins for “economical considerations” omit a very substantial issue that is a broadening access to alternative (non-organic in this context) energy sources by a growing number of countries.

Maybe, an already announced Russian project to establish an industrial He-mining on Moon circa 2015 is a practical correlation to flattering the whit prices only.
Posted by MichaelK., Thursday, 2 February 2006 12:00:03 PM
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