Can you smell what it is yet? It’s the aroma of greenery.
This morning three new green shoots appeared. They appeared in the UK among consumers; they appeared, surprisingly enough, in the auto industry; but above all else, they appeared down under.
The story of British consumers and the revving car industry is told in articles below. But first let’s focus on what must surely be one of the most intuitively surprising things to come out of the economic crisis to date.
As you know, this crisis is all about debt. Certain countries, especially the US, UK and Australia, went out and spent. Down under is perhaps the classic example of the way not to do things. Not for Aus a few years of balance of payments deficits. Aus has seen imports rise above exports for years and years.
In the bad old days, before the phrase credit crunch was on everyone’s lips, they used to say balance of payments deficits didn’t matter, that just because a country is buying more than it is selling, it does not mean it is insolvent.
Others were incredulous over this. How can that be. It is surely just a matter of time before all those excesses catch up with a country. And this crisis is surely proof of that. If a country runs up a current account deficit it must be expanding its net debt. And this will surely create problems down the line.
But if you take countries such as Australia and Canada, you find they have remained net debtors throughout their history.
Providing an economy is expanding most of the time, providing it has plenty of scope to continue to expand, then debt may not matter. Think of it in terms of a business that sees its profits double ever year, but its cash flow and need for investment are such that its overdraft doubles ever year too. Providing its overdraft is not too high relative to profits, then this constant overdraft may not matter.
Of all the G7 economies, Canada has of course suffered the least during this crisis.
And now it has emerged that Australia may avoid recession altogether. According to figures out yesterday, growth in the first quarter actually rose by 0.4 per cent. In the previous quarter there was a 0.6 per cent contraction, but before that growth was positive. Most economists define a recession as two successive quarters of negative growth, so that’s it then, recession has been avoided.
Of course, things may come back to haunt the economy later in the year. The economic cycle down under does run several months behind the UK, so it is possible the danger of contraction may come back like a boomerang to hit Aus later in the year. But for the time being at least, it seems sighs of relief are called for.
How did this happen? Well, it was pretty conventional really. The central banks slashed interest rates from 7.25 per cent to 3 per cent in seven months and the Australian government opened up the coffers and spent.
What is quite interesting about all this is that we are seeing how things don’t always work the way common sense would suggest.
Not so long ago most thought that it would be economies such as Japan and Germany which would suffer the least from the economic downturn; now we know that the reality was the complete opposite.
But now it is time to return to the UK, where more evidence emerged yesterday to suggest the UK also may be close to pulling out of recession.
© Investment & Business News 2013