Clouded forecasts

Poor old Wayne Swan. He didn’t even get an entire day to celebrate the fact that Euromoney magazine had named him the world’s best finance minister before those pesky people at the International Monetary Fund downgraded its growth forecasts for the global economy and the Australian economy.

The IMF has cut its Australian forecasts from 2% to 1.8% for 2011 and trimmed the growth forecast to 3.3% for 2012.

The IMF’s forecast for 2011 is now in line with the Reserve Bank of Australia’s own forecast of 2%, although the global monetary fund is clearly more pessimistic about next year than the RBA, which has forecast above-trend growth of 4.5%.

This morning, Swan has rushed out a statement saying that IMF had issued a “stark warning for the global economy, highlighting that it has entered a dangerous new phase”.

But he was also quick to point out that the IMF has confirmed “our fundamentals remain strong with the Australian economy expected to grow faster than all major advanced economies next year, despite increased global instability”.

CommSec economist Craig James was also quick to play down the IMF’s downgrade, pointing out that while global growth has been downgraded from 4.3% to 4.4% in 2011, that is hardly terrible given the long-term average is 4%.

“Two years of 4% growth would be very good after 5.1% growth in 2010. There are risks ahead, and the risks are very much focused on Europe and the US. But provided China, India and the rest of Asia remain in good shape, then the global economy will post ‘trend’ growth.”

So let’s not start panicking that the Australian economy is suddenly going to go down the tubes. Yes, there are clear risks from the situations in Europe and the United States, but the Australian economy is very well placed to handle these risks.

Our mining industry remains strong, our Budget is in excellent shape, our politicians remain committed to fiscal responsibility (unlike many other developed countries) and our central bank has plenty of scope to cut rates as and when is required (although don’t expect the RBA to rush into this).

I am not big on the whole at-least-our-economy-is-doing-better-than-the-rest-of-the-world argument – I think it provides little comfort to a retailer in Brisbane struggling to keep their business afloat that they are doing better than a similar retailer in Chicago or Prague – but I think Swan and Craig James are right in that we don’t want to get too hysterical.

Yes, this post-GFC hangover is going to run for a longer than period than many expected. The chairman of the Government’s Future Fund, David Murray, yesterday repeated his warning that growth will remain low for as long as 20 years while the developed world works to find solutions for the debt crisis.

But entrepreneurs in Australia that can target the right niche and keep their businesses lean can still do well – much like our economy, in fact.

And on that note, let us offer a word of congratulations for Wayne Swan on his best treasurer gong.

It is pretty hard to argue with Euromoney‘s citation that Swan demonstrated “careful stewardship of Australia’s finances and economic performance both during and since the global financial crisis”.

“Throughout that time, Australia has not only avoided falling into recession but has been the best performing of the world’s developed market economies,” Euromoney said.

He may have inherited a strong economy from the Coalition and he may have had the mining boom propelling the economy along, but the way Swan and then-PM Kevin Rudd were able to quickly respond to the GFC with stimulus for households and business (particularly the special investment allowance tax rebate) was crucial in getting the economy through this period.

But an equally difficult challenge for Swan and anyone else who might end up as treasurer lies ahead. Steering Australia through the period of structural change that is hitting industries such as manufacturing and retail will not be easy and moving to a carbon pricing mechanism is also proving difficult.