George Magazine

economy US: THE FISCAL CLIFF The US was first to go into the crisis so it's a little further along the track than some countries, but there are still obstacles ahead. Kunnen says the US economy is growing, but only modestly, and even that modest growth has slowed this year. Significantly, on 31 December 2012 the nation reaches what's been dubbed the 'fiscal cliff'. At that time a range of tax cuts are set to expire and spending cuts are scheduled to kick in. And the cuts are "large—very large," Kunnen says. He believes it will be "another near miss" but if the measures go ahead it would be a real crunch point, and not just for the US. "We can't deny that if the US does poorly so does the rest of the world," he says. "If the US had a recession, China would be hurt and that would hurt us." EUROPE: THE DEBT MOUNTAIN Meanwhile, Europe's struggle with a mountain of sovereign debt in member countries continues and Kunnen notes that it will take years, not months, to resolve. "All countries, including Germany, have to get their finances in order," he says. "That means for the next couple of years there'll be reforms that don't help economic growth there in the short term." That will have an indirect effect on Australia. "Who is China's second-biggest client, maybe its biggest? It's Europe," Kunnen says. "If Europe slows, the Chinese won't be able to sell as much, which means they won't need as much from us." technologies. Businesses have to be creative in the products they make and they have to understand their markets." THE CHINA SYNDROME There has been talk that a slowing from very high rates of growth in China will possibly bring about a premature end to the resources boom—the thing that in large part protected us from the GFC. But Kunnen says there's a big difference between cyclical ups and downs in demand for Chinese goods and the structural change that's still going on in China itself. "China is still seeing very solid growth and that's a fundamental change, a foundational change," he says. "They're industrialising and urbanising … and that takes steel, which takes coal and iron ore, which is what we sell." THE WEST VERSUS THE REST Not everyone is benefiting from the mining boom. Western Australia and Queensland may be the epicentre of economic activity, but slowing population growth has pulled Victoria back a gear, while consumer caution and the high Australian dollar are hurting South Australia's manufacturing sector. In NSW there is hope that stabilising financial markets and house prices might boost its below-average growth. Demand from WA and Queensland for labour and other resources is creating problems elsewhere, Kunnen says. "The high wages being paid in mining and related services mean IF THE US HAD A RECESSION, CHINA WOULD BE HURT AND THAT WOULD HURT US. That said, there are other forces at work in China that will continue to work in our favour (see 'The China Syndrome'). WHAT TO DO? The Reserve Bank's view is that Australia remains "relatively well placed" to respond to shocks to global and domestic demand. But each industry and business will have its own possible strategies. In the short term, they'll need to look through the daily swings in markets, politics and sentiment—to a certain extent, anyway—and to the reality of the situation. In the longer term, it's about being smart. "The whole notion of productivity is hitting the headlines," Kunnen says. "We have to be better educated, we have to have the latest and the best construction firms and manufacturers, for instance, struggle to compete for skilled labour." Strategic responses include looking for ways to tap into the boom. Kunnen calls it the 'Portaloo' effect: "Somebody has to finance [the boom], somebody has to provide the workers with food … there are so many services that go into mining," he says. RESOURCES St.George's quarterly economic outlook and state economic reports are available at www.stgeorge.com. au/corporate-business/report-centre george.economy 45

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