Australia | Dec 23 2009
By Andrew Nelson
While for some it may seem a long time ago, it’s only been just over a year since many were glumly discussing the possibility of another Great Depression if somebody didn’t do something soon. But 2009 became a year when governments and central banks around the world stepped in and delivered fiscal policies that were unprecedented in their size and scope.
To be fair, many of these polices were actually kicked off in the tail end of 2008, but it wasn’t until this year that financial markets started to once again believe that there was a light at the end of the tunnel. Yet before that confidence was regained, the Dow Jones index had tumbled to just 6,547 points by March after starting 2009 at over 9,000 points.
What the market took a long time to realise is that even in the early months of 2009, parts of the global economy were already beginning to stabilise, the economists from Commonwealth Bank note. The first signs were the high frequency indicators of business activity and consumer confidence and they began to lift in early 2009 . By the middle of last year the harder indicators like industrial production and retail sales also began to improve.
By the end of this year, employment is also starting to look better and this is typically the last economic indicator to turn up at the end of a recession, Commonwealth notes. Even the employment outlook in the US, which was ground zero of the financial crisis, has started to show some sign of stabilisation over the past few months.
The question is: what have we learned from it all?
The economists from Commonwealth say there are 3 big lessons that investors should walk away with from this year. Confidence is crucial, governments matter and fundamentals count.
As soon as Lehman Brothers collapsed the confidence of consumers and businesses also collapsed. Consumers stopped spending, businesses cut payrolls, and capital expenditure reduction and a recession that was already happening only picked up pace. However, the thing that really turned what was then still a run of the mill recession that few had noticed into a near economic apocalypse was financial institutions that started to sit on their money.
While the move was aimed at preserving liquidity and capital, Commonwealth notes that what resulted was a “negative feedback loop” of reduced lending and less spending, thus allowing higher bad debts take hold. The higher bad debts necessitated even higher liquidity and capital to deal with the problem and around and around we went.
Meanwhile, confidence took a nose dive, and once confidence is lost it becomes a difficult and expensive thing to rebuild. In the end, it took what was an unprecedented level of concerted government intervention to back up financial systems. The end result, aside from arresting the economic free-fall, is that the role of government will now likely change.
While Commonwealth suggests that it will probably take a few years to unravel the exact impact government intervention had, the fact governments had to attend the party in the first place means that further regulation to “de-risk” financial systems will be on the cards for years to come. In fact, the debate will likely remain near the top of the agenda given higher taxes and lower government spending will be needed in the future to rein in the budget deficits that were created or enlarged by this year’s stimulus policies.
Australia once again proved to be the lucky country, given its reasonably sound financial system was only a peripheral casualty of a Global Financial Crisis – a crisis that was really the fault of a North Atlantic financial meltdown, notes Commonwealth. With the Federal Government not needed to play as large a role in the financial system, as was the case in the US and Europe, Canberra was free to spend significant sums to stimulate private spending and increase public works. The fact that Australia was sitting on a nice little budget surplus also meant the tap of public money was able to be turned on quickly.
On the other hand, some governments pulled a bit too much out of the well. This is nowhere more evident than in the smaller economies in Europe. Credit rating agencies of late have started to ring the alarm bells by cutting credit ratings on select European government debt, or at least revising down their outlook on these nation’s credit ratings. Hello Greece, Austria, Spain, Portugal.
Asia, on the other hand, stands at the opposite end of the spectrum, with credit ratings in emerging Asia being lifted of late. However, in Asia the fundamentals remained strong enough to allow respective economies to rebound quickly. Yet while Commonwealth admits that emerging Asia is big enough and resilient enough to save itself, taking Australia along for the ride, the rest of the world is going to have to look after itself.
