WHAT affect will Europe’s debt crisis have on business in Australia in the next year?
There is no doubt that the difficulties in Europe will continue to impact on Australian businesses. Not only will we face continuation of the slowdown and poor growth prospects in Europe impacting directly on our trade sector, but the volatility in European financial markets will spill-over into the Australian markets. The overarching concern is around sovereign risk and whether the banks have sufficiently solid balance sheets to withstand some default. We will not be able to avoid being dragged into a banking crisis if one spreads through Europe.
Is it likely to affect China and Australia’s trade relationship given the China/Europe issue?
China has some challenging economic problems of its own. Growth slowed in 2011, albeit down to a respectable 9 per cent pa coming off 10.4 per cent in 2010. Part of this slowdown was attributable to tightening monetary policy as the Chinese authorities grappled with a potential breakout in inflation. Managing price pressures induced by rising labour costs and spiralling land and real estate prices, particularly in the urban areas, is arguably the biggest challenge for the Chinese at present, rather than any happenings in Europe.
In terms of Australia’s trade relationships, the biggest factor at present is the continued appreciation of the Aussie dollar. Is the crisis as dire as what we saw in the US in 2008? What’s different?
The 2008 crisis was extraordinarily painful for many but the really painful events played out fairly quickly. Bankruptcies, failures and bailouts hit hard but fast. While the various policy responses have been criticised, nonetheless there were policy responses led by President Obama and these were coordinated and generally addressed the problems. The US administration quickly learnt the lesson from the Lehman collapse that it has to provide some guarantee to the markets. The European crisis is vastly different in that it is revealing itself slowly and generally in the absence of a coordinated policy response. The difficulty is arguably political rather than economic. Various rational economic policy responses are available but the question remains as to whether there is the political will to implement them. Further, it is not clear who will serve as the ‘guarantor’ should matters worsen.
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