It will be worse – and longer – Swan

Wayne Swan is warning that Australia now faces a much deeper and longer global downturn than previously expected.

The Treasurer was commenting on the latest IMF forecasts.

The IMF has forecast that the global economy will contract by ½ to 1 per cent in 2009, before staging a modest recovery in 2010.

This is a downward revision of 1 to 1½ percentage points from the IMF January World Economic Outlook. That was released only seven weeks ago.

Mr Swan said this shows just how rapid and severe this global recession has become.

The IMF also expects advanced economies will suffer deep recessions in 2009.

It says GDP across advanced economies now expected to fall by over 3percent in this year.

Emerging and developing economies are expected to grow by just 1½ to 2½ per cent in 2009, compared with growth of more than 6 per cent in 2008.

Mr Swan said the IMF had also seen massive falls in economic activity in the final quarter of 2008, with global GDP falling by an unprecedented 5 per cent, on an annualised. Basis.

On that basis, growth in advanced economies had contracted by 7 per in that time.

The United States had seen its economy shrink by 6 per cent.

And Japan’s GDP had fallen by a massive 13 per cent.

“Many emerging economies also contracted sharply due to falling external demand, tight financial conditions and tumbling commodity prices,” Mr Swan said.

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Rudd strikes Turnbull hard over alcopops tax

Kevin Rudd wasn’t pulling his punches in Federal parliament yesterday.

The Prime Minister said the opposition’s vote, to reject the so-called alcopops tax in the Senate, would have “an immediate impact on hospital emergency wards throughout Australia.”

These popular soft drinks, spiked with alcohol, are a favourite with Australia’s teenagers, especially girls.

And the government deliberately made them more expensive, in April   last year, when it started collecting the alcopops tax

The Senate’s  decision will  blow a $1.6 billion hole in Federal budgets, over four years.

“Those opposite wanted to give a tax gift to the alcohol industry,”  Rudd thundered, on the last day of parliament’s autumn sittings.

The  vote of Family First Senator, Steve Fielding, was critical.  It decided the issue.  But political analysts were particularly puzzled by it.  It will make Friday and Saturday nights much more worrying, for thousands of Australian families, with teenage sons or daughters.

Senator Fielding said he voted to block the tax  because the government would not agree to ban alcohol advertising during television sports programs.

And  the government might well be seen as obdurate, on that point.

The net effect of the Senate’s vote, though, will undoubtedly be that Australian teenagers will consume more alcohol spiked drinks.

And the Prime Minister is right.  That will be dangerous.

The Opposition Leader, Malcolm Turnbull, retaliated, by moving a motion of no confidence in the Rudd government, over its handling of the global economic crisis.

But, predictably, that went nowhere.

The government doesn’t have the numbers it needs in the Senate, to push its legislation through.

But it does have a majority in the lower house, the House of Representatives.

And it is not reluctant to use it.

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Rudd curbs executive pay

The Federal government believes its decision to to curb executive pay is well timed.

Especially as it coincides with an outbreak of public anger in the United States, at big bonuses that the American International Group decided to pay its executives, even though the big insurer is already on taxpayer funded life support.

So far, there are few examples of quite such flagrant abuse of taxpayer funds in Australia.

But one case comes close.

Recent  reports suggest that the retiring CEO of Pacific Brands, Paul Moore, is to receive a $3.4 million termination payment.  That raised public eyebrows.

Especially as Mr Moore’s departure, from December this year, followed the company’s decision in February to close its factories, throughout Australia, and move its manufacturing operations overseas.

More than 1,800 Australian workers, including many in regional areas, were sacked as a result.

The company has received millions of dollars worth of support from the public purse, over the years.

The government’s curbs will start with big termination payments, that are often called golden handshakes.

At present, shareholders don’t have to be consulted unless these termination payments exceed seven times a director’s annual base pay.

But under the new arrangements, that the Treasurer Wayne Swan announced yesterday, shareholder approval would be required for any termination payment exceeding one year’s base pay.

“The government’s reforms will empower shareholders to more easily reject such payments, when they are not in the interests of the company, the shareholders or the community,” the Treasurer said.

Mr Swan said these payments had become “more common and – in some cases – more obscene.”

The government has also ordered a broad ranging inquiry into excessive executive pay.

These decisions will certainly attract criticism from the Opposition Leader, Malcolm Turnbull, who recently described Kevin Rudd as “the wealthiest Prime Minister Australia has ever had.”

But the issue will also be a difficult one for the Liberals to handle.

They are often accused of being too close to big business.

Mr Turnbull, himself, drew sharp criticism last month, after he said Mr Rudd had been “enriched” by the neo-liberal policies, that the Prime Minister had criticised, in an essay.

But the issue is tricky, for Labor, too.

Especially as Mr Rudd’s wife, Therese Rein, a highly successful business-woman, might, herself, be affected by the new curbs.

The Corporate Law Minister, Nick Sherry, who announced the, inquiry, said it would be conducted by the Productivity Commission.

He was blunt in his condemnation of executive greed.

“Unrestrained greed in the financial sector has led to the biggest global recession since World War II,” Senator Sherry said.

Mr Swan said, too, that the public had been “rightly offended by excessive golden handshakes, in which directors and executives were rewarded for poor company performance.”

The government is also broadening its definition of termination payments, so that they cannot be exempted on technicalities.

But the new laws will not be retrospective.

Mr Swan said existing termination contracts would be allowed to proceed.

Another minister, Senator Nick Sherry was even more blunt.

He said the global economic crisis had been ” precipitated by executive greed.

And he said that crisis: “…has now spread across the world and instigated significant slowdowns in the US, Europe, China and caused more than 50 banks to collapse.”

Millions of jobs had been lost, as a result, he added.

Senator Sherry announced, too, that Professor Allan Fels, a former chairman of the Australian Competition and Consumer Commission, would join the Productivity Inquiry into executive pay levels, as an associate commissioner.

He said Professor Fels would bring “a wealth of experience” to the role.

Professor Fels has worked in the area of competition and consumer regulation for 16 years, Senator Sherry said.

The Senator promised, too, that the inquiry would be broad ranging.

“There is significant community concern about excessive pay practices, particularly at a time when many Australian families are being hit by the global recession,” he declared.

He said the inquiry would also examine international trends and responses to the problems of excessive risk taking and corporate greed.

“The Rudd government has made it clear that it will examine all workable options with regards to executive remuneration,” Senator Sherry said.

And he promised that the public would be given plenty of opportunity to make its views known.

“All interested parties are invited to make a submission,” he said.

The commission will be required to report by the end of the year.

The government has asked it to study trends in executive pay, both in Australia and overseas.

It also ordered the commission to report on the effectiveness of existing laws, for the oversight of executive pay.

The government said, specifically, that loans to executives, which do not have to be repaid, would come within the scope of the inquiry he ordered.

Senator Sherry also said that the Productivity Commission would look, in particular, at the interests of Australians who now have big stakes in the nation’s major companies, through the shareholdings of their superannuation funds.

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G20 Finance ministers upbeat

The world’s developed countries are determined to tackle the deepening global economic crisis, but they can’t agree on how this should be done.

This became evident yesterday, when G20 finance ministers, meeting in England, adjourned without issuing a clear statement of intent.

However both President Obama’s representative, Timothy Geithner, and Australia’s Treasurer, Wayne Swan,  emerged from the meeting, encouraged by it.

“The world is with us on this,’ Mr Geithner said.

“We will do what is necessary to get the economy moving again,” he added.

Mr Swan was also upbeat.

“It was a very encouraging outcome,” he said.

“I saw a resolve that I haven’t seen before,” Mr Swan said.

However Mr Swan admitted that “there are some reservations” about how the crisis should be tackled.

France and Germany, in particular, are making little secret of the fact that they are worried about rising government debt levels. They are arguing for tighter regulation of global financial markets.

Mr Swan said different circumstances in different countries might dictate different approaches to the crisis.

He warned, though, that the world must deal with the toxic assets, held by many banks, deliver fiscal stimulus and boost the International Monetary Fund, so that it can help less developed nations deal with the consequences of the crisis.

The Finance Ministers’ meeting was meant to pave the way for a G20 Leaders’ meeting, which President Obama, Kevin Rudd and other world leaders will attend, in London on April 2.

Stimulus:the hidden risk

As we all know, visitors can sometimes reveal deep secrets.

They don’t usually mean to betray their host’s confidence.

They just don’t realise, all too often, just what they have done.

A visiting World Bank economist, Vikram Seth had just such a moment last week.

“In my experience,” Mr Seth told Private Briefing over lunch, “stimulus packages can quickly become pro-cyclical, rather than counter cyclical.”

Like all economists, Mr Nehru talks in riddles, at times.

But his meaning was clear enough, in context, at the time.

(Your correspondent had hardly touched his wine, at that stage).

Mr Nehru was saying that government spending, meant to boost a flagging economy,  all too often actually inflates an already recovering one.

Of course, as Shakespeare put it, this is “a consumation devoutly to be wished,” in the world’s present circumstances.

The US Fed chief, Alan Greenspan, has, of course,  predicted that America’s recession could be over by late this year, or early next year, if that nation’s banks can be fixed by then.

At present, though, Mr Greenspan is as a voice crying in the wilderness.

But Australia’s Treasurer, Wayne Swan, did admit in Parliament, late last week,  that the Federal government’s response to the global economic crisis, which erupted suddenly last September, had been “swift.”

And even the government’s critics admit that it has also been bold.

The main critic, Malcolm Turnbull, has also argued that an approach based on tax cuts would have been much more effective.

But the Prime Minister, Kevin Rudd, disagrees with the Opposition Leader.

Mr Nehru, though, has identified a risk that neither has said much about, at least so far.

The government’s stimulus packages does contain  substantial plans for infrastructure spending.

There has been much talk of many of  these projects being “shovel ready.”

Most, though, are not.

And if the government is still spending heavily even on, perhaps worthwhile, infrastructure projects, like new roads, bridges and rail links, that spending could well, in Mr Nehru’s words, prove to be pro-cyclical.

That is, it might well boost inflation, when the economy is already recovering.

If that happened, the consequences could well be serious.

And we all saw, last September, just how quickly an economy can turn.

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Investment advisers to face tougher rules

Financial advisers can expect to face much tougher licencing requirements.

Closer official scrutiny of their operations is also likely.

These developments are likely to follow a Federal parliamentary inquiry into Financial Services in Australia.

They were prompted, particularly, by the collapse of Storm Financial,  Opes Prime and other recent corporate failures.

Investors, who have lost millions in schemes promoted by companies like these are, mostly still waiting even for relatively meagre payouts.

All they have receive so far, at least in abundance, is sympathy.

The Federal Superannuation and Corporate Law Minister, Nick Sherry, added to that yesterday.

“The Rudd government feels for families affected by these corporate collapses,” he said.

That statement of concern was included in a press release Senator Sherry issued, welcoming the  inquiry, which will be conducted by  the Parliamentary Joint Committee on Corporations and Financial Services.

Committees like this one have strong powers both to compel witnesses to appear and to punish those whose evidence is seen to be either false or  misleading.

Some measures, tightening the rules under which financial advisers operate, have already been flagged.

A new national regime, which will be introduced into parliament by mid year, will include:-

• Making margin loans a financial product, under the Corporations Act.
• Dramatically increasing levels of simple, plain English disclosure documents, for new investment
• Compulsory disclosure of commissions
• Imposing a tough responsible lending obligation on all margin lenders
• Boosting consumer protections and options for redress, by requiring margin lenders to be licensed, properly trained and members of an external disputes body.

None of this, though, will ever replace the normal caution, that the investors themselves will still need.

The share market collapse, over recent months, has, at least contained on very important lesson.

It is that using equity in  your home, to play the stock market, is definitely not a one way bet.

That might have appeared to be so, in the past.

But that lesson must not be allowed to fade, in the years ahead.

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Share markets still looking for the floor

The US banking crisis is still casting a dark shadow over the world’s share markets.

The Dow Jones industrial index closed more than 100 points down Friday, US time, reaching another new six year low of 7,365.67 points.

Europe was much the same, with the DJ Stoxx index falling 71.80 points over the weekend, Australian time, to  close at 1,814.48 points.

Shares in the Royal Bank of Scotland plunged almost 12 per cent, on a single day’s trading, in that time.

Even Australia’s Treasurer, Wayne Swan, has responded cautiously to the bank rescue package, that the US Treasury Secretary, Timothy Geithner, announced last week, giving it heavily qualified praise.

In a television interview yesterday, Mr Swan described Secretary Geithner’s package as “a very important step along the road.

“But there’s more work to be done so that we can get a coordinated international response (to the global economic crisis),”  Mr Swan said.

“Particularly when it comes to financial system stability,” he added.

It was market disappointment, with the Geithner banking package, that set off the latest bout of weak trading, on world share markets last week.

That’s understandable as one US economist Nouriel Roubini now estimates that total US bank losses, so far, will add up to $US1.8 trillion, a figure that puts President Obama’s $US 787  billion stimulus package into the shade.

Mr Swan also said that both he and the Prime Minister Kevin Rudd are looking forward to seeing some substantial progress at  G20  finance and leaders’ meetings, that are scheduled to place in late March and early April.

Meanwhile, as Australia’s Reserve Bank Governor, Glenn Stevens, admitted last Friday, the short term outlook for Australia remains weak.

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Reserve Bank Governor states his case

The Reserve Bank Governor Glenn Stevens is urging Australians not to be overwhelmed by the global economic crisis.

Appearing  before a parliamentary committee in Canberra early today, Mr Stevens said China’s emergence still has several years to run.

“It has years to run and Australia will benefit from it,” Mr Stevens said.

“We should not lose sight of that, or other positives,” he added.

Mr Stevens admitted though that the global economic turmoil, which followed the collapse of Lehman Brothers last September, had been the most intense seen for decades.

And it had damaged both business and household confidence in Australia.

But he added:”The worst of the turmoil was actually short lived – a matter of weeks.”

He admitted, though, that this  had not ended the matter.

Since then there had been a series of events which have had significant impacts on the global economy, Mr Stevens said.

And the short term outlook for growth is still weak.

But, if the bank’s views turn out to be even close to correct, Australia will still do better than many other countries,” Mr Stevens said.

“We have claimed all along that Australia was better positioned than many countries to ride out the international difficulties,” he added.

He is now replying to questions put to him by members of the House of Representatives Economics Committee.

The new Shadow Treasurer, Joe Hockey, is among those appearing on the committee panel.

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