Economic cycle

The World Today – Thursday, 13 March , 2003 12:41:06
Reporter: Stephen Long
ELEANOR HALL: Well back to Australia now, where the wild times have been continuing today on currency and stock markets. After hitting three-year highs a week ago, the Aussie dollar has fallen against the greenback for the second day in a row. And stock markets are reacting to the disarray on international markets.

But there was some good news. New figures out today show unemployment fell last month, even though the economy shed more than 12,000 jobs. But as we follow the daily highs and lows, leading economic forecasters at a Sydney Conference are warning of a worrying longer-term trend.

BIS Shrapnel’s chief economist Frank Gelber says we’re on the verge of a new boom-bust cycle that will culminate in a worst recession since 1991.

FRANK GELBER: We’re going to have a big cycle this decade, with a boom and a bust like Keating’s recession we had to have, very similar to the boom and the bust of the 1980s, an asset price bubble – which is what they call an investment-lead boom – followed by recession.

ELEANOR HALL: Well, our Finance Correspondent Stephen Long heard the full story of this gloomy prognosis at the Forecasters Conference, and he joins us in the studio.

Stephen, this is a disturbing forecast for the economy, especially when other reports in recent weeks have talked of Australia’s economy as a world-beater. Just how bad are things now looking?

STEPHEN LONG: Well, the view of BIS Shrapnel and Frank Gelber, Eleanor, is that people who think we’re in some kind of virtuous cycle of stable growth, and the Reserve Bank can deftly twiddle the economic levers to maintain stability, are really not thinking straight and talking a load of rubbish.

He says we’re on the verge of this boom-bust cycle; next year we’re going to see the start of the boom, culminating in a crash in late 2006-early 2007, where economic growth falls perhaps to negative two per cent, so you know, really serious recession.

And the reason why we’re heading for this boom-bust is that we’ve got a series of investment cycles coming together all at once. Investment in business is going to be strong, because we’re hitting capacity constraints, unlike in America.

We’re facing a construction boom, that’s going to push the economy up, and then it will come crashing down with high interest rates before that, double digit interest rates, as the Reserve Bank tries to ramp back high inflation to try and bring down this sort of roller coaster economy that’s heading up – bang, off we go, recession.

ELEANOR HALL: This prediction of double digit interest rates will possibly worry some people as much as the prospect of a recession.

STEPHEN LONG: Yes, certainly, and BIS Shrapnel seems to think that people have good reason to worry. Frank Gelber was saying this morning that although we’re not going to see interest rates of 17 per cent, like we saw in the 1980s, we’re still looking at 10 per cent plus, 11 per cent, and people are more highly-leveraged now, people are mortgaged up to the hilt, and on top of that, people have been using their mortgages with these new bundled-up loans to buy cars and boats, finance renovations, holidays, and so people are running at such high debt levels that a lot of people could be left in really serious trouble if we see double-digit interest rates.

ELEANOR HALL: The recession will hit them hard.

STEPHEN LONG: Mmm.

What the mind of man can conceive and believe, it can achieve.