Latest NewsAustralia in Pole PositionThursday, 15 September 2016

by Alan Kohler  Bus.Spec.

The Japanese election result is a distant blast reminding us that there are big things going on elsewhere.

But down under, it's business as usual: we're even talking about interest rates going up again.

And even the landslide victory by the opposition, the Democratic Party of Japan, seems more an historic repudiation of the country's post-war political system and the incompetence and instability of the LDP, than a simple voter backlash to recession.

In Australia interest rates will rise soon: if not tomorrow then certainly before Christmas, signalling an official end to the crisis ...
if it can even be called a crisis.

So what was it all about? And will there be any lasting damage - political, economic or social?

It was about short- and long-term interest rates in the West being held too low for too long, resulting in a huge increase in debt and over-investment in productive capacity. There is now an overhang of both debt and capacity that needs to be cleared.

Some of the debt has now been socialised, along with some of the losses from the resulting crash in both housing and share markets. In most western countries both the debt and the losses remain largely in place, and the retirement savings of a generation have been ruined.

Nevertheless, the recession in global GDP has all but ended and markets are anticipating a continuing V-shaped recovery (not a W) - partly on the traditional grounds that the worse the crisis, then the bigger the bounce.

Meanwhile those who were predicting a far worse downturn, including the IMF, the Bank for International Settlements and yours truly, are looking silly and in some cases are still warning that the crisis did cause lasting damage and that there are still problems ahead. Markets are paying no attention to them.

And even in a world that is recovering, Australia is an island. This is almost entirely due to two significant shortages: of houses in Australia and commodities in China, as its economy roars out of a brief downturn turbo-charged by bank lending.

Those two shortages have kept up house prices, and therefore consumer confidence, and last week we saw business investment bounce back unexpectedly from a shallow downturn - 3.3 per cent growth in the June quarter versus market expectations of minus 5 per cent, which probably just tells us the forecasters are still too cautious.

As a result June quarter GDP in Australia is likely to be much more than barely above recession levels - closer to 1 per cent.

Which in turn means that Treasury's ridiculed forecast of 4.5 per cent growth in fiscal 2012 is not only likely to be correct, but will probably happen earlier than even Treasury predicted.

What's more, there seems to be almost no lasting damage to the Australian economy, apart from the federal budget. And despite the warnings from an increasingly desperate coalition, even that is not particularly serious.

Australia's housing sector will be tested when interest rates start rising, but there seems little reason to expect a delayed collapse. As Christopher Joye has been writing in Business Spectator,the housing shortage is real and lasting.

China's recovery is equally real - and if you don't believe the GDP statistics, then look at electricity output, as Robert Gottliebsen has been pointing out.

The key danger is that China will suffer a banking crisis, although the government is probably willing and able to step in if that occurs.

Another danger is that the Australian dollar rises very sharply on the back of Chinese electricity production and rising interest rates here, causing serious problems for exporters.

As for the markets - the massive destruction of housing wealth in the United States is likely to result in the US economy, and therefore profits, disappointing, which could produce a big Wall Street correction.

In which case, global investors may have to look for somewhere with a rising currency, good banks, and a strong economy ... such as Australia.