The economy has slowed but it is certainly not sinking

It's pointless to panic | The Australian

The economy has slowed but it is certainly not sinking

THE good news is that yesterday's bad economic information, showing the economy contracted by 0.5 per cent in the December quarter, could have been worse. There is no denying that the first decline in eight years and the job losses that inevitably accompany it are unfortunate. But this is a result that all Australia's major trading partners would wish they had had. While yesterday's national accounts demonstrate that Australia's economy was dead in the water last year, with annual growth of just 0.3 per cent, at least it did not sink fast. In contrast, the US economy declined by five times our figure in the last quarter of 2008 and Japan sank by 3.3 per cent, not for all of 2008, but for just the last three months. Even China ceased to steam ahead. While the comrades are careful with information and do not publish quarterly figures, analysts predict the Chinese economy did not grow at all in the last three months of last year.

But there is no reason to revel in our relatively good performance, because the poor performance of these large economies shows us the shape of things to come. Certainly, with the banks still solvent Australia is in better shape than virtually all members of the G20 group of developed economies and there is the occasional ray, however feeble, of economic sunshine. On Tuesday, the Reserve Bank declined to cut interest rates, demonstrating that while the economy is taking water, it is still safely afloat. However, there is no way we can navigate around the wrecks of the world economy. If the US, whose consumers buy Asia's exports, continues to go backwards, it is hard to see how China, Japan, and the rest of export-oriented Asia, for that matter, can grow this year. And without global growth, demand for our energy exports will drop, dragging the rest of the economy down with it. The chance of the last quarter being the only occasion when the economy contracts is remote. News yesterday that vehicle sales in the first two months of the year were 20 per cent down on the comparable period last year is just one of many signs that times are hard.

The question is how much harder they will get and for how long. Just as we are still suffering from Treasurer Wayne Swan's determination to slay the non-existent inflation dragon by urging the Reserve Bank to raise interest rates in the first half of last year, the impact of government stimulus packages and interest rate cuts will take a while to have an impact. It took time for the Government's $10.4 billion Christmas cash splash to breathe any fire into the economy, and the effects of the $42billion stimulus package announced in early February will not be apparent for months. There is also a risk that people frightened by a worsening economy will save their cash payments, as many did with some of the money they received in December. Yesterday, Prime Minister Kevin Rudd warned that Australia cannot not swim against the global economic tide. True enough. But as a beach-going people, we know that the tide turns, that rips don't run forever, and that the way to survive in rough water is not to panic.