Why we won’t double dip in 2010

Why we won’t double dip in 2010

As we launch into another trip around the sun I thought it appropriate to explore both the doom or zoom scenario for 2010. This blog will present the reasons why we won’t have another recession in 2010 and next week I argue why we will. Meanwhile I’m off to see a movie with my split personality.

Towards the end of a recession conversation always turns to concerns of what’s called a ‘double dip’ i.e. a recession followed by a brief period of growth followed by another recession. But while it’s possible, it doesn’t usually happen, kinda like sleep for new parents. And there are a number of reasons specific to Australia for this. Firstly, unless we suddenly drift off into the Atlantic Ocean, we’re part of Asia. We have a Mandarin-speaking PM and, aside from the odd blue, China is a new mate. The UN predicts this new mate will have a GDP of 8.8% in 2010 and will need shiploads of raw materials to continue its nation building and coal to fire its generators. That’s our job and it’s good work if you can get it. In addition the UN is predicting an Asia-wide-led recovery for 2010 so that means even more demand for our goods and services from other neighbourhood besties like Japan, Indonesia, Malaysia and Singapore.

The few times that a double dip has occurred (early 80s and after the Great Depression) it was due to premature tightening. And no, that’s not a Jenny Craig weight-loss strategy. It refers to monetary policy. Specifically this means raising interest rates too early to curb inflation and/or prematurely withdrawing stimulus to cool things off a tad. However, this time around world leaders and the now-influential Group of 20 are adamant there will be no tightening until the recovery is definitely go. Phew!

As for fears of a share market crash – fuggedaboutit. With inflation and interest rates low and a planet of cash looking around for places to park itself the share market still has a ways to go. That said I do think it will slow down to grow only around 5.5%.

The other big thing to watch is the US economy because a double dip there would be a shocker for the rest of us. Despite the fact I have written about the unwinding of our interdependence with the US (remember the old adage if the US sneezes we got a cold?), it still represents a huge chunk of the international economy so it matters big time. The good news out of there is that inflation is low, house prices are bouncing back and banks are starting to lend gain. And while employment is stubbornly high remember employment always lags behind the rest of the economy in a recovery. As AMP’s Shane Oliver pointed out in his recent newsletter, unemployment peaked there two months after the end of the ’82 recession, 15 months after the ’90-91 recessions and 21 months after 2001 recession.

Well that’s it for my rosy take on the year ahead. Next week I will invite the clouds of doom to shut out those pesky shards of hope. Until then keep trickin’.