Australians should not lose sleep over Europe's nightmares



The economic news from Europe in recent days has not been good. And it could get worse as the year progresses. Those guys have big problems. But let's not spook ourselves by imagining it to be any worse than it is.

Unfortunately, there has been a tendency in parts of the media to convey an exaggerated impression of how bad things are and of the extent to which Europe's problems translate into problems for us.

Take last week's downwardly revised forecast for the world economy this year from the International Monetary Fund. We heard a lot about the fund's dire warnings of what could happen if the Europeans did not get their act together, but what was not made clear was that the fund's actual forecast was for global recession to be avoided.

Though the growth forecast in the world economy this year was cut significantly from the forecast in September, at 3.3 per cent it is below the long-run average of about 4 per cent, but still comfortably above the 2 per cent level generally regarded as representing a world recession.

On the day, no one thought it necessary to tell us - even though the Treasurer, Wayne Swan, reminded journalists of it at his press conference - that, from our perspective, the fund's revisions were old news. They were surprisingly similar to the revised forecasts the government adopted in its midyear budget review last November.

The fund has the United States growing by 1.8 per cent this year; Treasury had it at 2 per cent. The fund has the euro area contracting by 0.5 per cent; Treasury had it contracting by 0.25 per cent. For China, the fund has growth of 8.2 per cent, whereas Treasury had 8.25 per cent. For India, it is the fund's 7 per cent versus Treasury's 6.5 per cent. Bottom line? The fund has the world growing by 3.3 per cent, while Treasury had it at 3.5 per cent.....

When Treasury did this sum in the midyear review, growth in the world economy of 3.5 per cent translated to growth in our main trading partners of 4.25 per cent. All this despite Europe's recession.

Fran Kelly of Radio National Breakfast did go to the trouble of asking the lead author of the fund's World Economic Outlook, Jorg Decressin, what the revised forecasts meant for us. His reply deflated most of the hype we have been subjected to.

"Australia will be affected by these downgrades only to a limited extent," he said. Oh. "At this stage, growth in output for Australia is still reasonably strong.

"Growth in Australia is importantly driven by major investment projects that are in the pipeline and these are funded by strong multinationals that don't have problems assessing funding." Oh.

"There is no advanced economy - or maybe there are one or two - that is as well placed as Australia in order to combat a deeper slowdown, were such a slowdown to materialise, and that's because, well, you still have room to cut interest rates if that was necessary and you also have a very strong fiscal [budgetary] position."

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