This article appeared in Issue 3#5 (July/August 2009) of Business Franchise Australia & New Zealand
An economic rebound in 2010 … Significant risks of interest rate increases, not cuts! … Confidence reviving and even driving the coming economic uplift in Australia … Federal budgets NOT staying in deficit for five years … Job losses still coming for a while … Discretionary spending (for which read rims and extras rather than tyre replacements if you’re a tyre sector franchisee) booming back in 2010 … Keep your shares (equity) investments at risk in these circumstances…
These are the key points from a tyre-business economic outlook I gave to the Tyrepower Convention in Cairns in April, 2009. The audience reaction was a combination of shock, disbelief, delight, relief, seeking fuller explanations, wondering why this isn’t the media grab on things at present … Oh how we differ! But, enough said to explain why these not entirely-conventional views and outlooks need to be substantiated or more fully amplified. I seek to do that in this article in a direct, pithy way.
The address was supported by a number of slides with charts and figures on them. All the figures can be found easily from the websites I give at the end of this article. It is a good thing to follow them for yourselves. They support the story and the vision given here. The words I used probably meant more. I’ll summarise what was said here.
Reflections on the Muck-up in 2008
Very few people at the start of 2008 saw how seriously the year would turn out. This is basically what happened:
- The US sub-prime crisis spread to big-sized banks in the US, to Europe and then globally as we found out that many banks and financial bodies outside the US had supported the sub-primes directly and indirectly. Big names of good former reputations were involved. The regulators and credit raters did not know or did not tell us these connections;
- Shares tumbled: typically stock-market prices dropped 35-55%. Confidence slumped too;
- Almost every country adopted stimulus packages (SPs) and cut interest rates. That was wise. November 2008 was the big month. Mostly, the SPs haven’t worked yet;
- Government budgets blew out. Deficits emerged out of strong surpluses, as we well know in Australia;
- Unemployment rates started to rise, following the crash in orders from discretionary spending, loss of profits and failures of firms.
Embarrassingly, nobody seems to have picked the crunch, apart from the knockers who could never see anything else. So economists and other pundits get asked by practical business people, what is known now as The Queen’s Questions: “Did you not foresee this, and if so, why not?”
The honest answer is, “No, not to that extent.” The elaboration contains some defences and excuses that are credible, and some admission that our tools are deficient and need to be sharpened. I offer three personal answers.
First answer: many economists have such abiding faith in the self-correcting nature of market systems that they are blinded to any prospect of the events that we can now chronicle from middle 2008. Heterodox economists do not so suffer, because their approach embodies crises and instability consistent with recent facts. But I do not recall any of this second group using their more ‘realistic’ approaches to predict the timing and magnitude of the 2008 events.
Second answer: many financial operators concealed relevant facts about their activities and exposures from public and regulator gaze, to the extent that no alert economist could have foreseen the said developments. The concealed Ponzi procedures (paying returns from capital inflows) that the Securities and Exchange Commission (SEC) was established in USA in the early 1930s to identify and outlaw are the outstanding example. It does things like our ASIC (Australian Securities and Investments Commission.)
Third answer: the regulators (mainly government) and credit raters (mainly private) failed fully enough to interrogate and pester, and thus to identify and publicise the missing information in the second answer. In the absence of any major changes in approach since the crunch began, this failure is unforgivable and damages the prospects of economists and policy makers doing their jobs. Even in later 2009, it is difficult to see that any major changes have been made to give the regulators the relevant boosts or greater teeth for doing what they are supposed to do. I find this amazing.
Logically, these explanations give the clue to what needs to happen for recovery to take place. The market needs to correct, based on confidence and any help from the policy measures taken. So…
Why the Uplift as we head in 2010?
I do not manufacture economic forecasts to please people or to be different. I have research-based models, independent insights and articulated reasons.
Here are the reasons:
- As spending power has collapsed through the private sector and globally, only support from government income boosting will restore it in the short term. The magnitude of the SPs is so great that it will be working by middle to late 2009, to the point that SPs will have to be pruned in 2010 to they don’t overdo it. We can take the lead from China, where the large stimulus package started in November 2008 is really working and sending Chinese economic growth rates back towards the 10% zone from which they came. Knocker economist arguments that they crowd out the private sector are not presently applicable, because spending power is so slumped that slack capacity abounds through most of private industry, as many of you will know directly. My concern is that as recovery picks up, in 2010, so will capacity utilisation and the SPs will start crowding out and become inflationary.
- So much bad news that was unexpected has dinted confidence and we’re not through it all yet. This has caused much spending arising from households and businesses to be pruned where the opportunity has arisen to defer or cancel the outlays. Corporate motor vehicle replacement cycles have been lengthened a good 6 months on average, causing vehicle sales to drop over 20% on an annual basis since October 2008. Later into 2009 the better ratio of good to bad news will turn confidence about, whence private-sector spending will rebound. This turnaround will encompass making-up for delayed discretionary durable purchases over the last few months, impacting on business equipment, motor cars, and white appliances especially.
- Low interest rates are in the right position to reinforce the tendencies in 1 and 2 even though they will not ‘cause’ the uplift. There is a lot of economic evidence on this point, and it goes partly to explain why many I meet in business are impatient to see recovery when they realise low interest rates have been in place for many months now.
If you remain to be convinced, please think very closely about how these three factors, of confidence, fiscal policy stimulus and low interest rates will affect our economy. Combine that with the excellent general shape of our banking sector and the impact of China rebounding on our mineral and general exports.
If you sense that an economic rebound is in the air, then a few things will require action from various parties, including you. My list appears below.
Consequences of the coming uplift
There are policy challenges: SPs will need to be pruned and the RBA will be moving rates up – probably not like the nibbling increases they did in the 2004-8 period.
- Businesses will need to have ample product supply and to achieve some price recoveries from the bruising period of 2008-9.
- Financial placements will need to be at risk to get the most out of the share market revival, which has probably already started.
- Budget balances will revive almost as quickly as they collapsed – tax revenues will rebound and spending on unemployment and SPs will abate.
- There might not be as much time as you may think to achieve the changes in your organisation, planning methods, deals with bankers, accountants, associates and franchisors that are easier to do in the slump.
Action points for you, directly include the following:
- Make up you own mind on how long or deep the current crunch will be;
- Don’t take panic reaction on slumped share values. To sell equities is to consummate the losses. Converting super or managed funds from growth to cash or stable is doing the same thing;
- Consider all fundaments on your location, promotion pricing and products strategies, internal organisation, staffing structures, accounting systems and planning methods. Crunch time is good time for all these things;
- Realistically, get ready for some competitors biting the dust.
And of course, keep reading the economic scene for yourself, while listening, critically to what ‘experts’ are saying. Some good and very easy helpful sites are as follows:
They’re full of information easy to find and they’re free, except that as any economist can tell you, the cost of your time can be counted in. Use it wisely.
Neville R. Norman is a graduate of Melbourne and Cambridge Universities, Associate Professor of Economics at the University of Melbourne, a current and former adviser to many business and government groups, an expert witness in commercial legal proceedings, a professional speaker and is Immediate Past President of the Economic Society of Australia (2004-7).
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