Crisis spreads faster
THE Federal Treasurer, Wayne Swan has warned that the economic crisis is flowing through to developing economies much faster and more brutally than expected – including Australia’s major trading partners.
Mr Swan emerged from a weekend meeting in Washington of the G20, a group that includes developed and developing nations, saying he was now more worried about the likely effect in Australia and all options were on the table should they be needed.
“People are very sombre because this is now spreading to the developing economies,” he said.
But despite the assessments being gloomier than a few days ago, Mr Swan said he believed Australia would avoid a recession.
“My view is we are still better placed, but what is new in the outlook the IMF has given us, and through feedback in meetings and discussions today, is this is spreading with far greater speed to developing economies,” he said.
In an interview shown on the ABC’s Insiders yesterday, Mr Swan said although Australia would also be hit harder by the crisis of the past week, “all our advice at the moment is that we will continue to grow”.
The G20 meeting received a detailed presentation on the latest International Monetary Fund forecasts, which have been revised since the World Economic Outlook was released last week.
It confirmed the forecasts of near-zero growth in advanced economies and below-trend growth in emerging and developing economies over the next 18 months.
But the worrying news from Australia’s perspective is the effect on potential demand for our commodities, which have helped fuel growth well above the levels of the US and Europe.
The IMF’s economists warned of decreases in exports out of emerging/developing economies, more expensive foreign credit and a dramatic decline in confidence.
The US President, George Bush, told the finance ministers that “whether you’re rich or poor, developed or developing”, the economic crisis was a huge challenge.
On Friday the G7 – US, Britain, Japan, France, Italy , Germany and Canada – agreed to co-ordinate action on a five-point plan, which includes injecting capital into troubled banks, buying toxic assets and insuring credit markets in an attempt to restore liquidity and confidence in the markets.
But the opening of the Australian and Asian markets today will be the test of whether investors believe the actions are sufficient and swift enough to restore confidence.
Some analysts expressed disappointment that the G7 plan did not include immediate actions or deadlines, although there is speculation in the US that the Treasury Secretary, Henry Paulson, will begin injecting capital into US banks by the middle of this week.
Australia has already taken some actions recommended by the G7 plan. The Prime Minister, Kevin Rudd, has announced plans to “broaden” a deposit insurance scheme for account holders over the weekend.
After the G20 meeting, Mr Swan left open the possibility that Australia may take further action, including direct injections into financial institutions and further cuts in interest rates.
“I am not going to pre-empt events; everything is on the table. But I make this point: our banks are well capitalised and there’s a world of difference to where they are and many other financial institutions in the world,” Mr Swan said.
“We are sensibly evaluating all approaches that are being taken elsewhere in the world. We have more room to move in terms of monetary and fiscal policy than most other countries and that will stand us in good stead.”
Lowering interest rates was important to help people in places such as western Sydney, where house prices have fallen, leaving some people with negative equity, he said.