Ken Henry and the double dip

Posted 25th August 2009

Is it just me or is this the recession the horticulturalists had to have? There’s the green shoots, there’s the yellow weeds in the green shoots and of course there’s the woods that we are not out of yet. The economy had been a verdant rolling pasture of budding economic data until the other day when Australian Treasury Secretary Ken Henry entered the room. Dr Henry, who is also a board member of the Reserve Bank, started up his two-stroke Victor motor mower this week and lopped the tops off the green shoots by raising the possibility of a second global shockwave lurking around the corner (for the visual among us that would be a W graph). ‘It’s possible that there will be a second shockwave,’ the good doctor said. ‘There’s no reason to think it will be anything like the first shockwave in size and intensity – it won’t be – but there could be a second shockwave to hit us and that too could have implications for future growth.’

And he has a point.

Last Wednesday the world’s stock markets took a battering with a very bad showing in China that sent the Dow Jones US Index, the widely adopted measure of the US stock market, down 186 points. Which is a lot. This comes despite claims by many US economists that the recession there is already over. However, take a closer look at the latest US data and frankly signs of an enduring recovery remain elusive. As Nouriel Roubini (the guy who called the whole sub prime mess first) wrote in Forbes the other day, ‘Data from the US – rising unemployment, falling household consumption, still declining industrial production and a weak housing market – suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.’

Roubini reckons the United States will clamber out of recession at the end of this year, but like Dr Henry, he thinks it could fall back into a ‘double-dip’ recession that would drag us down with it. What all this means for the average household is, like everything at present, uncertain. But if we did have another economic drop the good news is interest rates would stay on hold if not go down ever further as the Reserve Bank tries to stimulate demand. However, the bad news is employment may go up from its present figure of 5.8%.

I’m off to plant a few green shoots of my own.

In other news …

The Reserve Bank Board has just released the minutes from its August meeting during which it flagged a possible rate rise due to fears inflation is not falling as fast as it had hoped. However in the next breath it expressed concern that such a move could hurt confidence and thus hamper our green shoot recovery. So stay tuned on that one. Meanwhile the Board also noted that it’s still unclear how much of the greater than expected buoyancy of our economy is due to Rudd’s stimulus package.