Henry Sees Cyclical Angel Descending

26 Feb

As recently as October 2009, Treasury Secretary Ken Henry predicted a Golden Age for the Australian economy, that will “stretch to 2050”:

“While the global financial crisis has taken some of the heat out of our export prices, we should get used to the idea that we could have structurally higher terms of trade for some time, possibly for several decades,” he said.

In a speech at the Brisbane University of Technology, Henry said Australia’s population will grow as the mining boom, fuelled by demand from China and India, will continue to bring in immigrant workers. Handled correctly, he said, this could provide a “period of unprecedented prosperity”.

Henry pointed to growth in several Asian countries, which he said will give a boost to the mining boom that will see it last for several more decades into 2050.

Just one week ago, RBA Governor Glenn Stevens‘ colleague, Assistant Governor Philip Lowe, also had a vision of the cyclical angel returning from the heavens:

I am quite optimistic that story has some decades to run and that underlies much of the positives for the Australian economy,” Lowe told an economic development forum in Sydney.

“It is going to be a good 20 years for China and us,” he said.

And only 3 days ago, RBA Deputy Governor Rick Battelino too, joined in the angel chorus:

Mr Battellino was uncertain about how long the current boom would last, but said past booms had lasted around 15 years.

“On this occasion, the growth potential of countries such as China and India suggests that the expansion in resource demand could continue for an extended period, though this will depend at least to some extent on the economic management skills of the authorities in these countries, not to mention our own,” he said.

Illustration - nicholsoncartoons.com.au

Reassuring stuff. Or is it?

Three days ago, former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos saw something rather different:

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said. “And deflating that gently will be difficult at best.”

A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University.

And two days ago, the former chief economist of the International Monetary Fund, Professor Ken Rogoff, also failed to see a Chinese cyclical angel descending. He saw the angel of doom:

China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt- fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Ken Rogoff.

“We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said.

Rogoff was one of very few economists who predicted the GFC.

Ken Henry, and all the boffins at the RBA… did not.

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