Oh, what a difference

Back in 2005, Germany had the highest unemployement rate among the major economies of the EU (of the big four including France, UK, Italy and the PIGS economies of Portugal, Ireland, Greece and Spain). Ireland had the lowest. Today, as Moody's downgrades the credit rating of six European countries, Germany has the lowest unemployment among them all. How fortunes have changed in such a short span of time. It should be noted that the Deutschland during the global financial crisis went alone in not stimulating its economy.

Could this be a case of free-loading? Stimulus only works when everyone does it, otherwise some of the fiscal spending leaks out through imports of foreign made goods, not benefiting the local economy. Germany, having benefited from the stimulus spending of its neighbors during the GFC, does not relish its present role in bailing out its ailing neighbors. A classic case of "no free lunch."

The Australian Contagion

The past week saw global markets move in response to the announced hike of interest rates by the Reserve Bank of Australia. It was taken as a sign of global recovery, Australia being the first of the G20 (Group of 20) countries to come out of its downturn. The Australian dollar approached levels not seen in over a year (chart below produced from Yahoo!7Finance).

PM Kevin Rudd was criticised by the "doyen of Labor economic advisers" Ross Garnaut for his social democrat inspired stimulus package in response to the global financial crisis.

The secretary of the treasury, Ken Henry quickly defended the government response by highlighting the counterfactual scenario of an additional 100,000 unemployed and more prolonged downturn without the spending.

The latest unemployment figures seemed to support this with an unexpected drop in the unemployment rate and a rise in the number of hours worked. This was in stark contrast to the unexpected increase in the number of workers unemployed in the previous month in the United States. The Dow Jones industrial average took it all in stride ending up at new highs for the year.

Latest polling figures show the Labor government having a seemingly supreme advantage over the Liberal opposition, a result that has fuelled speculation over the fate of its leader Malcolm Turnbull.

Turnbull having staked his leadership on climate change policy was castigated by former Treasurer Peter Costello as he announced his early retirement from Parliament.

With the current government riding high on a wave of both local and international respect, the early election scenario now seems a distant possibility as Treasurer Wayne Swan predicted a better than expected result for the budget prior to the release of the Mid-Year Economic and Fiscal Outlook.

Having coupled itself to the Chinese and emerging Asian economies which have exhibited resilience against the global financial crisis and having relatively little exposure to the sub prime markets, Australia finds itself in the best of all possible worlds with the growing demand for its mineral exports triggering a huge investment project off the Western Australian coast.

The challenge for the government now would be to manage both in the near and medium term the steady unwinding of government stimulus. The first part was accomplished with the phasing out of the top-up stimulus to the housing market announced last year. The withdrawal of bank guarantees is being thoroughly studied but is proving difficult. Winding back of monetary stimulus has already begun in earnest.

With monetary and political business cycles not in sync, expect monetary and fiscal policy to be in continued conflict for the next twelve months or until the next election, whichever comes sooner.

The Magic of Markets (with a little help from its friends)

The Recession that never was may have been the downturn that we had to have.

As featured last night in the finance segment of the ABC evening news at 7 by presenter, Alan Kohler, the S&P/ASX200 in one year has returned to its previous level set prior to the collapse of Lehman Brothers in mid-September of 2008 (see the chart below produced from the ABC website).

This means that for investors in the local market, it is back to square one. Mid-March of this year is generally regarded as the turning point, when world markets rallied.

Similarly household debt financing as a share of income has gone down to the pre-boom level as at June this year (the upper lines of the following chart taken from the Australian Parliamentary Library website). Conversely, the savings ratio has gone up (the lower line of the same chart).

This comes in the same week that US Fed Chairman Ben Bernanke announced the likely end of the US recession.

Whither now the pundits who predicted the end of Western (in particular Anglo-Saxon) Capitalism?