The Economy Changes Gears
[ The University of Melbourne Voice Vol. 3, No. 10
8 December - 12 January 2009 ]
Australians are famous for their have-a-go spirit. But that spirit is sure to be tested over the holiday season as traditional Christmas spending is balanced by ongoing fears of a recession and the lingering effects of the global credit crisis. DAVID SCOTT reports.
If there is a sombre note to our approaching silly season it can be blamed squarely on the US and its cumbersome regulatory system, according to Associate Professor Cally Jordan, an expert in corporate and finance law at the University of Melbourne’s Melbourne Law School.
“A hurricane of financial chaos has slammed a creaking and outdated regulatory infrastructure,” says Associate Professor Jordan. “It is anomalous that a country noted, and justly so, for its dynamic financial system, full of genius and innovation, should be burdened with such a difficult and, obviously, deficient regulatory regime. The cause is the US political and legislative system, with its exquisite checks and balances, and the key role played by lobbyists.”
Associate Professor Jordan believes that while the US was due for a correction of its overheated housing market, the problem was exacerbated by irresponsible lending practices.
“The manner in which these practices worked their way through the financial system is in part a testimony to the dangers of ideologically driven policy-making and denial in the face of imminent disaster.”
Had the Federal Reserve and the Treasury moved more quickly, would the crisis have been contained?
“The Hong Kong Government did not let ideological scruples deter their quick and decisive action in creating the Tracker Fund in the face of the Asian financial crisis. And the tidy profit they made in the longer term was sweet vindication, given the immediate criticisms of the ‘anti-market’ actions which they attracted,” she says.
“Of course, the solutions, the actions of the Federal Reserve and the US Treasury themselves, are a main driver of the chaos. That an administration so ideologically well-defined has engaged in this kind of an about-face pushes all the market panic buttons.”
The impact of the huge US mortgage investment losses, housing corrections and claims of financial mismanagement have reached Australia but University of Melbourne economist Professor Guay Lim (Melbourne Institute of Applied Economic and Social Research) is reassuringly optimistic.
Professor Lim says that unlike many countries, Australia is in a fairly good position to ride out the worst of the economic crisis. “We don’t think we’re going to be hit too hard by any recession, though we’re definitely going to see economic growth slow substantially, down to perhaps as low as 1.5 per cent.”
However Professor Lim believes that while the Federal Government’s injection of funds into the Australian economy was much needed, the Government is walking a tight line with its stimulus package – particularly over comments from Finance Minister Lindsay Tanner that it was prepared to boost its $10.4 billion spending package if the financial crisis worsens.
“The big question is, does the Government know when to stop? We don’t want it to over stimulate the economy and make the Reserve Bank of Australia’s job difficult,” she says.
In China a similar government-sponsored bail out to the tune of four trillion yuan should also be of direct help to Australia’s economy, says Professor Lim. “If China continues to buy our goods we will be fine.”
Initial signs from the Government’s stimulus package are encouraging. The latest Westpac-Melbourne Institute Index of Consumer Sentiment rose by 4.3 per cent from October to November. Almost 37 per cent of respondents to the consumer sentiment survey said they were saving especially for Christmas presents this year, up from only 15 per cent a year ago.
Consumers adopting more of a savings culture, particularly over the notoriously expensive festive season, is almost certainly a product of the current financial climate, says University of Melbourne Senior Lecturer in Marketing, Dr Angela Paladino.
Dr Paladino says that while there will be a lot of frivolous spenders who see the Government’s injections of rescue package funding as a quick bonus, there will be many others who see it as savings.
“I think you’ll find that many will spend it on paying off loans – particularly coupled with the recent interest rate cuts – and others will be spending it on long-term value durable goods. In the current climate, people should be saving for a rainy day as opposed to spending, as that day is likely to be sooner rather than later, though I would think that core goods will still be purchased.”
Dr Paladino sees this trend in consumer attitude also meaning changes to the way retailers market their goods. “I think you’ll find that retailers will focus less on what the actual items are and more on how it will bring the family together, the importance of family, and how it will save you money,” she says.
“There’s still going to be a strong element of consumerism, but it’s going to play more on people’s emotions and the joys of giving.”
She believes, however, that retailers could be in for a rude shock if they think traditional post-Christmas sales will boost their profits.
“People are going to be a little more discerning in their bargain-hunting. If they don’t think the price is right they won’t spend.
“I think you’ll even find that the New Year sales will be better than before. In the past it was spend, spend, spend at Christmas, with people then returning goods like crazy.
“But now people will be pickier on what they buy and how much they pay, which could leave shops with a larger inventory than is traditional for them at this time of year!”
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