Realisation of hard landing ahead for Australia

January 25th, 2009

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History will look at this week as the turning point in the Australian public’s perception of what is to come for the economy. Before this week, the mainstream assumed that Australia was on track to a soft landing (see Soft landing hope built on faulty framework assumptions). But with the release of much worse than anticipated economic data from China, that perception was changed. Prime Minister Kevin Rudd said that (see After 17 years on the way up, a rush back down)

China has been hit much harder than forecasters had predicted, its slowdown will affect Australia.

Last Friday’s The great stall of China in the Sydney Morning Herald (SMH) made it to the screaming front page headline.

Our readers should not be surprised at this news. 12 months ago, we already warned (based on deductive reasoning) that China was facing a major economic correction in Can China really ?de-couple? from a US recession?,

We may be wrong, but our theory is that this may be an epic boom waiting to be a bust. Note: we are not making a prediction here- we are merely expressing our scepticism on the de-coupling theory.

In reaction to this bad news from China, Treasurer Wayne Swan promised bold action from the government. The Prime Minister warned that the tests for Australians are yet to come. On another issue, the government also announced that they will organise a fund to help businesses roll over AU$75 billion of loans should foreign banks pull out of Australia. Again, we had covered that issue in November last year at Effects of retreating foreign banks in Australia.

You can see that the rhetoric from government are shifting from (1) denial to (2) underplaying the gravity of the situation to finally, (3) warning of hard times ahead. Denial, for whatever reasons, is the typical reactions of governments. In China, the government denied the truth to save face. In South Korea, the government even went as far as arresting a blogger whose forecasts of doom were disturbingly accurate. In the US, Ben Bernanke was forced to confess that he was completely wrong on his assessment of the US economy. The captains of the finance industry (including their armies of economists, analysts and forecasters) were deep in their denials too (e.g. see Aussie household debt not as bad as it seems?).

So, our dear readers, how can we trust ‘them?’

Is it too late to avoid a hard landing? We’re afraid the answer is a categorical “No!” As we said in Aussie household debt not as bad as it seems?,

A severe downturn to the Australian economy may or may not be statistically likely, but given the level of unprecedented leverage, you can be sure the impact will not be small. Be sure to understand the concept of Black Swans (see Failure to understand Black Swan leads to fallacious thinking).

The question is, how long and severe that hard landing will be. Our view is that since this hard landing is unavoidably long and severe, the best thing the government can do is to do nothing and let the bottom of the economic cycle come as soon as possible, clearing out the years of mal-investments and structural damage. Any intervention will drag out the pain for longer and postpone the day of sustainable recovery.

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