Analysis
Posted
Time is a precious commodity. And it is rapidly running out for the Federal Government on two key fronts.
With
fires raging across a parched eastern Australia, exacting an
intolerable toll on life and property even before the onset of summer,
the government is facing a growing backlash against its long-held belief
that our energy should be generated by antiquated, coal-fired steam
engines that pollute the atmosphere and accelerate the onset of global
warming.Given the prospect of another scorching summer, pressure is likely to build for a coherent, science-based climate and energy policy given the devastating impact climate change is having on the nation and the economy.
It's now clear that it is not just rising sea levels that pose challenges for Australia as rural output declines and the economy takes a direct hit — not from drowning, but burning.
Equally contentious is Canberra's rigid determination to deliver a budget surplus even as the economy weakens, which runs the risk of transforming a prolonged downturn into something quite ugly.
It's a stance that has put it at loggerheads with an increasingly desperate Reserve Bank now being forced to canvas an array of unpalatable policy options in an effort to stave off recession.
At the May federal election, financials trumped the environment, once again validating the advice to Bill Clinton in his campaign against George Bush: it's the economy, stupid.
Both issues, however, have begun to intersect and being behind on both fronts at the next election would be political suicide.
Rate cuts not enough to boost growth
There's little doubt interest rates will be cut to 0.5 per cent by February and that, in the absence of direct government stimulus, rates will be lower than otherwise necessary and for a much longer period. Every economic indicator is weakening.Inflation has been below stall-speed for almost four years. Growth is sputtering, at its slowest since the financial crisis a decade ago. Wages growth has stagnated to near all-time lows. Retail spending is in reverse. Household debt, meanwhile, remains among the highest in the world.
The one area of relative strength in recent years — employment — also has begun to deteriorate. For the first time in three years, figures released last week showed jobs were lost in October.
While monthly employment numbers are notoriously volatile, all the signals were discouraging. The number of people out of work rose by 17,000 and fewer people were looking for work.
That's despite three interest rate cuts since June to an unprecedented 0.75 per cent and tax cuts that were supposed to jolt the economy out of its funk.
Cutting interest rates — the only real tool the Reserve Bank has — is supposed to encourage households and businesses to borrow and spend, thereby lifting demand, boosting profits and economic growth.
That's not happening, and you don't need to be an economist to understand why. Australian households are hocked to the eyeballs, coming in near the world's most indebted at around 200 per cent of income.
With no wages growth, there is very little desire to take on even more debt, no matter how low rates go.
Rather than borrow more, it's now clear Australians are using the recent cuts to reduce debt. Just 7 per cent of ANZ customers have lowered their mortgage repayments.
The Commonwealth Bank has seen deposits grow 10 per cent, mostly mortgage offset accounts.
That's no bad thing in itself. But it illustrates a key phenomenon that John Maynard Keynes noted. When things look like turning ugly, consumers pull in their horns and spend less. That makes a downturn even worse.
Drought to hit export earnings
The drought of 2002 was among the worst on record. It was followed by one equally as severe in 2006. Back then, the Reserve Bank described weather patterns at the start of this millennium as "exceptional by historical standards".This drought is just as severe and intensifying.
Where once we had droughts of this magnitude every 40 years (Federation, early 1940s, early 1980s), they are now increasing in frequency and duration.
As this Bureau of Meteorology chart below shows, a substantial portion of the continent has recorded the lowest rainfall on record with a huge proportion either below or very much below average.
The tiny patches of blue show where rainfall has been above average.
The extreme rainfall shortages have been accompanied by a steady increase in temperature which is drying out the sub-soil and increasing evaporation rates of surface water.
This adds to the difficulty and length of time farmers face trying to recover and raises questions about our longer term ability to maintain food and fibre exports.
Farm output is likely to be around 8 per cent down on last year's levels, farm profits are off 20 per cent and rural exports are falling.
That will subtract from national economic growth this year at a time when mineral prices are in decline. Iron ore prices are almost 15 per cent below their peak earlier this year.
And that spells pain.
Big business and climate action
Mike Henry was anointed BHP's new chief last week, immediately seizing the opportunity to declare the company — one of the nation's biggest coal miners — was committed to reducing emissions.A decade ago, then BHP head Marius Kloppers agitated, successfully for a while, for the introduction of a carbon price.
That's put the company on a collision course with various other members of the Minerals Council and the Business Council of Australia.
Insurers, power generators, steel producers and a host of major Australian corporations have embraced the idea that climate change is real, that it is a long term threat to their business and that immediate action needs to be taken. Globally, companies like Shell and BP, major hydrocarbon producers, are committed to a renewable energy future.
For 20 years, however, there has been no consensus in Canberra, no coherent climate policy and repeated failures on energy policy with a continued push from some quarters to produce electricity from new coal burning steam engines.
Australia's carbon emissions reached a new record this year, partly because of a spike in gas exports.
It is debatable that even a shift to a completely renewable energy economy would have halted the devastating drought and fires spreading across the nation. But if we are to become one of the worst affected nations from climate change, perhaps it's time to take a leading role in affecting change.
It just might be good for business.
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