May 16th 2009

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Articles from this issue:

COVER STORY: Impending collapse of Australian agriculture

EDITORIAL: Implications of the budget black hole

CANBERRA OBSERVED: Kevin Rudd backs down on climate change

GLOBAL FINANCIAL CRISIS: IMF's global outlook: expect the worst

MANAGED INVESTMENT SCHEMES: Behind the collapse of Timbercorp

INTERNATIONAL TRADE: Re-inventing the wheel of international trade

CHINA: China sees US as dying Roman empire

INTERNATIONAL AFFAIRS: Taiwan's WHO entry breakthrough

UNITED NATIONS: UN anti-racism conference blames Israel

ARTIFICIAL REPRODUCTIVE TECHNOLOGY: Does family matter? Ask the kidsÂ…

POPULATION: One-child policy for Australia, says green group

ABORTION LAWS: Further threats from pro-abortion fanatics

RUSSIA: Russia faces catastrophic population decline

AS THE WORLD TURNS: Ageing population adds to financial crisis / Turn back the clock / Obama axes school voucher program

CINEMA: Shielding one's eyes from the truth - 'Good'

BOOKS: HEAVEN AND EARTH - Global Warming: the Missing Science, by Ian Plimer

BOOKS: WORLD WAR II: BEHIND CLOSED DOORS: Stalin, the Nazis and the West, by Laurence Rees

BOOKS: WAR AND MEDICINE, by Thuyavan with John Whitehall

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IMF's global outlook: expect the worst

by Peter Westmore

News Weekly, May 16, 2009
The IMF, for the fifth time in six months, has revised downward its economic forecast. In view of this worsening outlook, Kevin Rudd's optimistic projections for 2010 seem dangerously naïve, argues Peter Westmore.

The International Monetary Fund's World Economic Outlook, released last month, forecast a decline in the world's economic growth this year for the first time in 50 years, with the highest falls in the advanced economies of North America and Western Europe.

This was the fifth time in the previous six months that the IMF had revised its forecasts downward. Less than a year ago, the IMF had forecast world growth in 2008 to be a healthy 4.1 per cent.

Belatedly acknowledging the evidence that the world's financial system effectively seized up late last year, IMF chief economist Olivier Blanchard told ABC television's 7:30 Report that "the last quarter of 2008 was much worse than anything we had thought when we did the last forecast".

The IMF was not the only observer to get it wrong. ANZ chief economist Saul Eslake, in an address to his bank's Singapore clients just a month earlier, said he expected global economic growth to be zero this year, and nearly 3 per cent in 2010.

But Mr Eslake said that the global financial crisis would not end until doubts about the solvency of financial institutions are removed - and that is likely to require the commitment of hundreds of billions of dollars of additional government funds, and more bank nationalisations.

He said: "It remains a complex and politically fraught task and the global economy won't begin to turn around until this task has been accomplished."

He said that the global downturn has more in common with pre-war depressions than with the typical post-war recession, with economic activity contracting unusually sharply. Many countries (especially those whose exchange rates have appreciated) will experience deflation.

He also thought that "orthodox" economic policies would not reverse the current downturn. "There are some medium-term risks associated with monetary policy 'quantitative easing' and large budget deficits, but they are outweighed by the near-term risks associated with doing nothing."

The IMF's World Economic Outlook explains why it now thinks that recovery from the crisis will be slow:

"The core of the problem is that as activity contracts across the globe, the threat of rising corporate and household defaults will imply still higher risk spreads, further falls in asset prices, and greater losses across financial balance sheets.

"The risks of systemic events will rise, the tasks of restoring credibility and trust will be complicated, and the fiscal costs of bank rescues will escalate further. Moreover, a wide range of financial institutions - including life insurance companies and pension funds - will run into serious difficulties."

The "systemic events" to which the IMF report refers presumably includes the collapse of major transnational corporations like Chrysler.

The impact of the bankruptcy of Chrysler, America's third largest motor company, will be very extensive. The company has been operating under $4 billion of emergency US government loans since the start of 2009, after the company posted a loss of $8 billion, and its US car sales fell 30 per cent to 1.45 million vehicles in 2008.

General Motors is in similar trouble. Like Chrysler, General Motors received a multi-billion subsidy from the US government early this year. Its blue-collar workforce has fallen from 301,000 in 1991 to just 64,000 at the end of 2008. It is expected to be just 38,000 by 2011.

Even Ford, the largest US car-maker, is in trouble. After losing a massive $US14.6 billion ($A20 billion) in 2008, it lost a further $US1.4 billion ($A2 billion) in the first quarter of 2009. It will survive only through massive downsizing.

The loss of jobs in American manufacturing industry will be very severe, and with a corresponding contraction occurring throughout the economy, unemployment is expected to rise above 10 per cent this year.

The response of governments around the world has been to pump trillions of dollars into the failing banking system, to prop up their capital base and provide necessary liquidity to keep the wheels of industry turning. They have also distributed massive cash hand-outs to try to encourage consumer spending and rebuild confidence.

The question is: will it work? The London Economist recently observed: "The Depression showed how damaging it can be if governments don't step in when the rest of the economy seizes up. Yet action on the current scale has never been tried before and nobody knows when it will have an effect - let alone how much difference it will make.

"Whatever the impact, it would be a mistake to confuse the twitches of an economy on life-support with a lasting recovery. A real recovery depends on government demand being supplanted by sustainable sources of private spending. And here the news is almost uniformly grim."

For a country like Australia, which has allowed its manufacturing and agricultural industries to shrink, and which is dependent on the health of the developed nations of North America and Europe (which source many of their manufactured goods from China), Kevin Rudd's optimistic projections for 2010 seem dangerously naïve.

- Peter Westmore

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