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Rudd's election headache: The Asian economic cycle

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COMMENTS

14 May 2009 10:04

Mark points to the trifecta of official forecasts which assume that a sustained recovery in Asia’s growth is conditional on growth returning in the developed world. Australia’s budget expresses similar thinking but is not as explicit.

The Canberra caution is due to an unmentionable reality that hangs over the budget predictions. The reality that cannot be referred to by the Rudd Government or its econocrats is that the political cycle is hauntingly out of kilter with Asia’s economic cycle.

By the time of the next budget in May, 2010, all the bad news will have been lived through rather than merely being predicted. At that point, Australia will be six months from the federal election.

In the (election year) budget in 12 months time, the Government has to be able to offer the voters some hope that the worst is nearly over. The economy will have contracted and unemployment will have soared, but the promise has to be that the growth engine will be starting to rev again. The Rudd Government is already starting to rehearse that story in its predictions about the recovery timetable stretching through that federal election zone.

The budget papers put China at the centre of the Government’s recovery narrative. Everywhere else that Canberra looks in Asia it sees deep trouble. And Asia is where Australia sends more than 60 per cent of its exports. Treasury applies the label ‘bleak’ to Japan, saying it will ‘experience a deep and protracted recession.’ India is set to suffer ‘the corrosive impact of escalating job losses, shrinking foreign investment and deteriorating confidence.’

Treasury echoes Mark’s point with a discussion of Asia’s ‘reliance on external demand’:

When the global economy recovers, the growth trajectory of Asia’s trade could be lower for many years. Global demand will be weaker and there is a risk that trade protectionism may rise. The extent to which domestic demand can be built up, thus boosting the share of final demand met in the region, will also influence Asia’s trade prospects.

If the Labor Party is to go to the voters at the end of next year with a message of hope, the Asian impetus has to come from China. Treasury seldom does political cheer-squad duty. But it certainly goes looking for whatever positives it can find in its prediction about China’s immediate prospects:

With continued resilience in private consumption, and fiscal stimulus supporting growth from the second half of this year, China is likely to be the first major economy to recover from global recession. Indeed, the recent GDP outcome for the March quarter suggests that the slowdown may already be bottoming out. While a return to double-digit growth in 2010 and 2011 is unlikely given the expected tepid pace of the global recovery, growth of 8 per cent in 2010 and 8.5 percent in 2011 should see China contribute around 1 percentage point to annual world growth in both years, and help support the expected recovery in the Australian economy.

You may just detect a political whisper attached to that last phrase about China’s role in Australia’s economic rebound. The companion wish is that after the battering Australia will undergo in the next 12 months, China’s strength will ‘help support the expected recovery’ in the political fortunes of the Rudd Government.

China was vital to Australia in the good times so far this decade. And one of the few firm predictions possible about the shape of whatever recovery eventually emerges is that China will be even more important to the rebuild.

Photo by Flickr user graceinhim, used under a Creative Commons license.

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