Is the global economy headed for a Great Depression or is it a great beat up? A SmartCompany Q&A

The post-GFC blues won’t go away and now the words “Great Depression” are being bandied about, as the International Monetary Fund warns a slowdown in spending by business, governments and households spells trouble.

“The overarching risk is of a global paradox of thrift as households, firms and governments around the world reduce demand,” the IMF says.

“Downside risks have increased and are severe.”

So Great Depression or great beat up? We take a look in a special SmartCompany Q&A.

I woke up this morning and the national broadsheet has the words Great Depression in the first paragraph of the lead story. Isn’t there plenty of good news about?

The bottom line is that our economy is mixed, though stronger than most. The Government’s financial position is strong, our unemployment rate is the envy of the US and Europe, our terms of trades are topping records as the resources boom continues, personal bankruptcies are at five-year lows, personal saving levels have recovered from our pre-GFC binge, and the Reserve Bank has plenty of room to move if everything goes pear-shaped. Indeed, alluring hints from the RBA about its willingness to cut rates this year if needed have been cited as a key reason for a recent lift in confidence.

As the IMF says, our outlook “remains favourable, despite global financial market volatility in recent months,” and is tipped by the fund to expand by 1.8% this year, before lifting to 3.3% in 2012. This is underpinned by our links to China, whose economy grew by 9.1% in the third quarter, slightly down on estimates, but still a good rate in most estimates.

Sounds great. What else?

There have been a couple of signs over the past couple of weeks that things are turning the corner. Today’s Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was above the long-term trend, a signal Westpac says “warrants respect.”

There’s been a slight improvement in the Westpac-Melbourne Institute Consumer Sentiment Survey, a better-than-expected National Australia Bank business survey, and fall in the unemployment rate to 5.2%.

So why the frowns and the “Great Depression” talk?

It’s mainly driven by what is happening in Europe (where the debt crisis is still far from resolved) and America (where unemployment remains painfully high and growth remains very low).

As the GFC painfully showed, we operate in a global economy so there are legitimate concerns about the how the world’s politicians with an eye on voters and the world’s banks with an eye on shareholders and bonuses can really work out a way to prevent a collapse without crimping economic growth. Even with our booming resources trade, Australia won’t be immune.

But I keep hearing our domestic economy is the wonder of the developed world?

Well, it’s not all good news. Westpac says consumer sentiment is fragile and still vulnerable. In bad news for banks and retailers, Dun and Bradstreet’s Consumer Credit Expectations survey says just 20% of respondents plan to apply for new credit, from 33% in mid-2009, and the number of people applying for a credit limit increase has halved since the beginning of last year. Retail groups have warned that more retailers will hit the wall in the New Year if a bumper Christmas doesn’t eventuate, which is bad news in turn for employment and landlords.

Corporate insolvency records have hit several monthly highs throughout 2011 as the Tax Office cracks down on tardy businesses, and building and construction companies in particular seem hard hit.

Meanwhile, the mortgage belt is suffering under huge debt loads and the highest official cash rate in the developed world – let alone those despairing they can’t get into the housing market at all.

Housing starts have disappointed and property prices are going nowhere if dipping somewhat.

There’s also the uncertainty of minority Government, leaving significant policies like the NBN and carbon up in the air should the Coalition win the next election.

If the world does slip into another major slowdown how would we be placed?

To look at things from a glass half full perspective, a global economic slowdown would likely push down the Aussie dollar, which is good news for trade-sensitive industries – albeit amid constricted demand. (For the record, the IMF says the Australian dollar is between 10 and 20% overvalued.)

Should another downturn occur, our banks – although highly leveraged to a residential property market the IMF says is 10% overvalued over the medium-term – will be much better placed, given they have increased their deposit rates since the GFC to reduce their reliance on volatile wholesale markets.

It’s a point acknowledged by Guy Debelle (Assistant Governor, RBA) this morning, who said we “are not seeing the same sort of stresses for the Australian banks as are present for some of the European banks. The Australian banks’ funding structures are considerably more resilient to periods of stressed markets than they were previously.”

In the meantime, although sharemarkets around the world seem to lurch from one panic to the next, for the sake of sanity, the eurozone debt crisis needs a resolution.

And at home, unemployment and consumer sentiment are the key issues: despite 5.2% being a respectable number, many say it underestimates the number of unemployed and underemployed. People’s fears about the security of their own job or whether new jobs are being created will only encourage more caution.