May 7th 2005

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Articles from this issue:

COVER STORY: SECRET INTELLIGENCE: New evidence of Soviet espionage in Australia

EDITORIAL: Australia and China: supping with the devil

CANBERRA OBSERVED: Australia's impending economic slump

SCHOOLS: Give academic excellence a sporting chance

NATIONAL COMPETITION POLICY: Review whitewashes National Competition Policy

TRADE: EU and US try to force China to cut textile exports

DRUGS: Howard Government's drugs campaign falters

REGIONAL VICTORIA: Radical activists' campaign of sabotage

STRAWS IN THE WIND: Labor Agonistes / Blankety Blank / Gentlemen versus players / EU Light Opera

RUSSIA: Baltic States to boycott Moscow's World War II memorial

1955 LABOR PARTY SPLIT: Conference marks 50th anniversary of Split

1955 LABOR PARTY SPLIT: The Great Labor Split remembered

CONSTITUTION: Dangers in Howard's new centralism

RELIGIOUS VILIFICATION LAWS: "Witch" sues over Christian Bible study

How to tackle abortion and pornography (letter)

John Paul II's greatest achievements (letter)

East Timor and West Papua resistance (letter)


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Australia's impending economic slump

News Weekly, May 7, 2005
Federal Treasurer Peter Costello could be about to face his most difficult period since the Howard Government came to power.

Immediately before Peter Costello was due to bring down this year's Federal Budget, Ken Henry, secretary to the Treasury and Mr Costello's trusted confidante, made some rather out-of-the-ordinary comment about the state of the Australian economy.

While speaking in the predictable language that economists like to use ("on the one hand this, on the other hand that ... etc''), Mr Henry alluded to the possibility of Australia falling into recession.

In the context of the imminent budget - which is almost certain not to use the "R'' word in its forecasts - it was quite an unusual musing from the long-term Treasury chief.

Speaking at a Melbourne Institute of Applied Economic and Social Research seminar in Canberra in front of dozens of key policy-makers, economists and senior public servants, Mr Henry was careful to avoid making any definitive prediction.

In fact, he went as far as to suggest that a "soft landing'' for the Australian economy still could not be discounted, but agreed that such a scenario basically ran counter to all previous known booms.

Mr Henry conceded that, after more than 10 years of continued growth and an economy that was running close to its full potential, a bumpy landing had to be considered a likely outcome.

"We know from history that growth cycles end untidily,'' he said.

The words were carefully crafted not to embarrass his political masters, but nevertheless raised the prospect of something no-one in the Howard Government would dare discuss in public.

The long boom is over: where are we going to from here? Mr Henry's "untidy'' landing may turn out to be one of the great euphemisms of recent times.

Presumably his "untidy'' landing is not on the same par as a crash, an emergency or even a hard landing.

But it is safe to say Mr Henry believes the coming turndown in the Australian economy is going to result in some casualties.

At the same seminar, a former Treasury official and now private sector economist, Chris Richardson, was more blunt.

The Access Economics prognosticator said the housing bubble had well and truly burst and that any further rate increases by the Reserve Bank would add to the pain which was already being felt in the Australian economy late last year.

He said housing activity was grinding to a halt and that consumer spending had hit the wall.

It is fair to say the smartest economic minds in Australia know the economy is heading downward; what they don't know is when and how hard the fall will be.

The big uncertainty is the coming shake-out in the United States, which is running a current account deficit in the order of $600 billion a year.

Last year, that deficit was funded not by investors in the US economy, as had been the case for the previous decade or so, but by Asian central bankers, mainly from China and Japan.

In simple terms, China and Japan have been lending American citizens money so that they can continue to buy their products.

It is an unsustainable scenario and over the coming months the world is likely to witness and subsequently feel the pain of a collapsing US dollar, followed closely, if not preceded by, a crashing stock market.

Australia, with its highly traded and vulnerable currency, is likely to be caught up in this whirlwind of events, and politicians in Canberra are largely unprepared.

For the first few months of 2005, the main policy discussion has been about the problems of the Australian economy running at full capacity and the skills shortage crisis.

With the economy already slowing, both these "problems'' would disappear overnight if the US turned back into recession.

Mr Costello could be about to face his most difficult period since the Howard Government came to power - a task made even more difficult by the fact he may also have to manage the transition from Treasurer to Prime Minister.

After waiting a decade to assume the top job, the last thing Mr Costello wants is to be an unpopular Prime Minister up there with the likes of Paul Keating.

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