Why the road gets bumpy from here: Gottliebsen

From this point on the road becomes a lot more bumpy. As you will see below I invite readers to offer suggestions to smooth the path for non-mining Australia, but it will not be easy.

The looming falls in interest rates will not do much to smooth the path and, in the short term, they might even be counter productive because they will slash the income of many retirees.

As expected, last night on Wall Street the flow of ‘fear money’ from Europe to the US dollar eased, sending the American dollar lower but that did cause a rebound among shares.

I still think we are due for a normal stock market correction after the big fall but the flower of global confidence has been damaged and nowhere more so than in Australia.

After all we were the lucky country with an economy, according to the government, that was the envy of the world.

Yet we now understand that our banks depend on the European banking system for around 30% to 40% of their deposit money. If the European banks confess the truth that they have lost their capital – and much more – the flow of funds to our banks will be squeezed, although we do not have a liquidity problem.

In coming months we are going to see that the government’s predicted 2012-13 surplus is actually a deficit because there will be no substantial minerals resource tax revenue and corporate profits are down.

The latest Dunn and Bradstreet business expectations survey shows that Australian enterprises expect lower profits in the September quarter and most non-mining enterprises have stopped hiring staff, are cutting back on stock and slashing investment.

Any enterprise that supplies non-food retailers will feel the pinch. In food, Coles is saying it will not allow food suppliers to add the carbon tax to their prices and if that happens more and more production will be forced overseas where they don’t pay the tax.

In theory the lower interest rates should boost housing demand but the fear of job loss is affecting demand. The mining investment boom will underpin overall labour demand but a number of mining projects will be put into mothballs because of the sharp rise in costs and the fall in prices.

How can the bumpy road made smoother? We need China to do what they did in 2008 and undertake a major stimulus program. At this stage the Chinese have been tardy in their stimulus measures but they will face social problems if they allow their economy to slide.

But there are also strategies we can embrace ourselves. In the next 24 hours I am going to put together 10 things that Australia can do to regain momentum. I welcome your suggestions via The Conversation.

This article first appeared on Business Spectator.

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