Australia's dirty secret

Last week’s national accounts showed Australia is very close to technical recession. The commentators agree that we’re just splitting hairs - the recession has begun. So where to from here and what role does the stimulus package have against a darkening economic sky?

There was some practical advice from the Federal Government in weekend newspaper advertisements - get your tax returns in if you haven’t already, and if you’ve changed bank account, let us know, the money is coming in April.

We’ve heard a lot from the Prime Minister about the need for speed. Pump priming the economy must happen now. The opposition should “get out of the road”.

But are there other policy reasons for the timing of the stimulus package? I suspect the answer is yes.

The National Accounts for the December quarter show a dip in GDP of 0.5 per cent. They are not great numbers - they beg the question what next?

Commodity prices are falling back to earth - they will hit the ground this April. Australia’s coal and iron ore producers are currently negotiating with China. Prices are set by contract.

Next month is crunch time.

You don’t need a crystal ball to predict the likely outcome. China produces a vast amount of coal itself (40 per cent of world overall production), many times the amount it buys from us. It has domestic capacity in coal production on a huge scale. Years of double digit growth, however, meant that demand exceeded supply, and Australia among others picked up the considerable slack.

At its peak, China was building a new coal fired power station every eight days in a country where about a billion people still don’t have power connected to their home. (As a brief aside, think about that next time someone runs the hard green line at you over a latté - governments shouldn’t spend a cent on clean coal research, everything should go to renewables. That’s fine but there’s still about a fifth of the world’s population in China who just want to turn on a light bulb and a wind farm just aint going to get it done.)

China’s booming construction sector required steel on a massive scale and Australian coking coal and iron ore (key inputs) were sold at a high price.

But the dragon too is returning to earth.

Australian negotiators know they’re going to take a hit. The standard prediction, depending on who you ask, is that the contract prices will fall between 30 (Goldman Sachs) and 50 per cent (Access Economics). That is huge: about a 3.8 per cent fall in GDP (but not terminal considering the massive hikes in price over the boom). When it happens, expect the dollar to go through the floor (probably a good thing overall) and the commentariat to hyperventilate.