I've been reading the IMF is starting to eat a bit of humble pie over it's forecast for European growth. Seems they were a tad optimistic, though surprisingly (sic) their forecasts were very similar to various Euro Governments.
Seems the IMF believed that for every euro in austerity cuts made, their modelling predicted economic growth would only fall by 0.5 Euro. Turns out the fall in GDP was more like 1.5 euro for every euro of cuts.
Considering the debt levels of the Euro periphery, slow growth of most of their major trading partners, and the deleveraging of the private sector, I always thought the huge levels of austerity being forced on most countries were going to be counter productive. Like a business, you can cut costs as much as you can, but if sales only keep going down, well eventually there's nothing left to cut or grow.
Possibly the years of poor management have left Europe with no choice, since the credibility of the Governments there to enact a plan to stimulate growth now, and then cut spending as the economy started growing again, well you would have to question if they could do it.
Throw in the large number of zombie companies over their, companies that have been able to get access to cheaper debt funding, but can barely afford to pay the interest bill on it, let alone any capital with surplus left over to reinvest in the company for growth, is Europe headed for some lost decades like Japan? The creative destruction of the market is not happening as it should.
Still, it's economics 101 with the paradox of thrift that what's good for the individual - saving for a rainy day - can have quite disastrous effects when everyone is starts doing the same, and Governments are joining in. Where will the demand come from to generate growth and a reduction in unemployment. 50% youth unemployment in Greece and Spain is a scary statistic.
Surely the IMF could see that without a huge increase in growth via exports, fiscal austerity on already weak economies was going to do more harm than good? Every major economic area is trying to export their way to growth, and it's just not going to happen.
Now I'm wondering if Australia could be headed the same way. The public sector staff cuts in Queensland, with a similar potential should the LNP win at a Federal level, is causing more people to feel insecure about their jobs. We've already had a massive turn around in consumption in Australia - savings rate from 0 to 10% in just a couple of years - that was shielded by the sky high terms of trade. Now that shield is failing, what next? Credit growth is stagnant, businesses are not borrowing for investment.
With the media always happy to report of job losses, though you don't hear about the 150 jobs created with each new masters or bunnings opening, I have a real fear that Australia is going to hit its own paradox of thrift wall in 2013.
With 21 years of economic growth maybe it's time for a recession to help with the restructuring of the economy, along the lines of the "recession we had to have"?