Disconnected? The Oz Real Economy and US debt.

The global markets have held on for a wild ride recently with the increased volatility connected to the ongoing US debt concerns. Despite the last minute deal that was passed in the US Congress the move by Standard & Poor to downgrade the US government's ability to repay debt to AA+ has triggered an incredible amount of volatility. (see causes for more)
In Australia the fundamentals remain good however the financial marketplace has fallen with the ASX declining 20% since April. The report card of 4.9% unemployment, 3.6% inflation, high business investment in the resource sector and record of export prices compared to import prices (terms of trade) indicates a strong economy. The last quarter did have negative growth (however this was in comparison to the previous quarter) which added to the low retail sales (50 year low) has meant the concern and fear from consumers has become self perpetuating.

In Australia this means that the more people are fearful of the economy the worse the problem will become. As recognised by Chris Richardson of Access Economics

" People always think the markets and economies are the same thing. Markets are reasonable economic forecasters, but they are not economies" .

There are a number of factors which might in future impact upon the real economy of jobs, wages and living standards.

• Firstly the main result of the fall in the ASX will be felt by people about to retire regarding the fall in their superannuations savings.


• The slowdown in the global economy may mean that government policy is needed to assist consumption as exports slow down and domestic spending also slowing down.


• Thus the planned 2012/13 Budger surplus may be delayed.
  


• The RBA may need to drastically loosen monetaary policy. This is linked to the new found stability of the A$. In 2008 when the GFC hit the $A was considered a risky speculative prospect and dropped to 60cents from almost $1US. This time it has falled from $1.11 to a low of 99 cents. The result of this change in perceptions about the Australian currency is that exports remain costly and thus manufacturers, plus other service sectors have high costs and this will mean that interest rates will need to be dramatically cut to prevent the $A becoming an anchor on the economy. (see Help and hinderance for more)