THE ECONOMIC DOWNTURN.(Australia)

THERE IS A BLIZZARD of blame about the economy. The introduction of the GST and especially its unacceptable cashflow and administrative burden on small business is the chief culprit. The sudden downturn in the United States economy is the "nasty surprise". Treasury's inability to foresee the speed and size of the downturn is a vital issue. And the Reserve Bank's final interest rate hikes were obviously wrong, at least in hindsight.

There is a risk of backlash against "rational economics" and independent central banks. This article aims to sort out truth from fiction, to put our economic situation into perspective and to offer a clear way forward.

Every downturn is different, and contains an element of surprise. The 1960 credit squeeze was obviously too hard, and was compounded by effects of tax hikes on new motor vehicles not unlike the recent GST effect on the housing industry. The 1974 recession was created by a nasty cocktail in which the hike in the price of oil was the main external ingredient. Domestically, massive fiscal irresponsibility by the Whitlam government was compounded by a series of unsustainable wage rises. Treasurer Hayden put the right policies in place but the Fraser government reaped the political benefit.

The recession of 1981-82 was initiated partly by the second oil price shock. Another round of wage rises hit the domestic economy. Determined to limit the inflationary flow-on, the Reserve Bank hiked interest rates. Prime Minister Fraser's surge of spending initiatives further eroded business confidence and gave a belated stimulus whose main beneficiary was the next prime minister, Bob Hawke. A decade later the international downturn was again the major reason for an Australian recession. Domestically, Labor's "Accord" was limiting wage increases but very high interest rates were the major local factor creating "the recession we had to have".

The international downturn is again a major factor in the Australian economy. The low Australian dollar, regrettable on general grounds, has so far limited the direct effects of the global downturn, but slowing activity everywhere will affect us. I believe that, so far at least, it is the psychological effects of the sudden US downturn that have been more important. US Federal Reserve Board Chairman Alan Greenspan in January announced a sudden fifty-basis-point cut in US interest rates, followed almost immediately by another fifty-basis-point cut. While no doubt intended as a rational response to an equally sudden decline in a wide range of US economic indicators, this unexpected move has created a sense of crisis.

The big surprise in this episode is the speed of the downturn. This is the

first "new economy downturn". Businesses and households are far more geared to rapid response to real or perceived economic signals, and, once started, a downturn feeds on itself far more rapidly than in past episodes of economic downturn. In fact, when the history of this downturn is written, the suddenness of the downturn in virtually every country will demonstrate the importance of the rapid transmission of signals in the "wired" global economy.