Economists debate bulls vs. bears at van Eyk

Two economists have presented contrasting economic outlooks for 2010 at the seventh annual van Eyk conference in Sydney, predicting either a bullish recovery or a bearish slump for Australia.

The chief economist at Goldman Sachs JBWere, Tim Toohey, said despite the challenges ahead there was still reason to be optimistic. Neither inflationary forces in the East nor ballooning public sector debt in the West would be sufficient to derail a global economic recovery, he said.

“There are sound economic reasons to be bullish about Australia in the year ahead, including corporate profit growth, emerging market growth, a solid outlook for Australian commodities, a strong investment cycle around improving infrastructure, and consumption growth. In addition, factors such as upswings in freight movements, increased productivity, increased net equity inflow and improving currency carry trades add to the emerging picture of a strong Australian recovery in 2010.”

However, London-based global economist Andrew Hunt said government stimulus would have to be withdrawn at some stage, and the excess liquidity resulting from the printing of so much new money by central banks had produced a false dawn for economic recovery.

What he referred to as “quantitative easing policies” worked by encouraging leveraged institutions to take often aggressive positions in long duration bonds using short duration funding. He estimated these types of transactions generated at least US$3.5 trillion of ‘new’ demand in 2009 and were responsible for the rebound in risk assets.

“The current huge government budget deficits are clearly not sustainable in the medium term unless the governments concerned wish to impose crippling debt and hence tax burdens on future generations,” Hunt said.

Once Western central banks have withdrawn their stimulus policies they would “dramatically reduce not just the flow of money to the financial markets but also the life support system being offered to the still sick global real economy”, he said.

“We therefore expect considerable volatility in financial markets in the months ahead, although when it comes to it, we doubt that the central banks will really have the courage to switch all the systems off.”