Tue, 20 Jan 2009 01:56:58 GMT
Yesterday Access Economics joined the growing list of economic forecasters predicting recession this year. Of course forecasting the economy is a mug’s game and it is still far from certain that there will be a recession in 2009. But what is clear is that the economy will either be weak (most economists would call this a growth recession) or very weak (a full blown recession, with 2+ quarters of negative economic growth). As a business manager the key is to hope that the economy rides out the global storm in reasonable shape, but also to prepare for a recession. As a policymaker it is prudent to take the same course. Unfortunately the government and the RBA have so far assumed that the economy will only slow down moderately, and have not taken the strong action needed to avert the possibility of recession. Wayne Swan yesterday responded to the Access forecasts by saying that should the economy enter recession the government will take action. The problem is that by then it will be too late. The lags in most policy actions are quite long – if the government is considering further fiscal policy stimulus they need to make decisions and take action now. Further spending such as the $10.4 billion in handouts last December is not the way to go. There is plenty of room for government investment spending that will have much longer lasting impacts on the economy, and reduce the impact of the global slowdown on the economy. Spending on roads, airports, hospitals, public housing and so on should be brought forward to stimulate jobs and demand.
The RBA should also be cutting rates far more quickly and aggressively. Melbourne Institute forecasts now show that deflation is a possibility…i.e. the RBA does not have to worry about rising inflation anymore, and they to should be providing maximum stimulus. For a start the cash rate ought to be reduced to 2% or below, and from there the RBA needs to be prepared to continue to stimulate economy.
Unfortunately the Rudd government has been long on proposals and short on action in their time in office. I hope that they can stop procrastinating, and start taking action soon, rather than waiting for a recession that we don’t neccessarily have to have.
