Advance Australia where?

First, the big news: the recession will be over in three or four years.

That was the message from economists, politicians and business bigwigs gathered at the Future Summit 2009 in Melbourne in May when asked to predict the timeline for Australia's recovery from its current economic malaise.

But consider the framework in which this recovery is predicted to happen, with previous conceptions of the global economy shattered by the financial crisis, the world's industry encouraged to surrender its love-affair with carbon spewing industries and embrace 'green' alternatives, a regulatory framework being closely examined to ensure such a dramatic downturn is at least softened in the future and with the balance of power shifting subtly from US dominance to the emergence of a new Chinese superpower.

These are big issues for big times, but the good news is that it represents an enormous opportunity for people with bright ideas to capitalise.

The budget we had to have

Headlines after Treasurer Wayne Swan delivered the budget this year inevitably focused on the move to run a deficit of $57.6 billion, with many alarmist reports questioning the ability to pay off the big figure.

But most economists agree there was no alternative to the big spending - and that a properly directed program of government spending will benefit the country in the long term.

According to ANZ Banking Group chief economist Saul Eslake “it was inevitable and right and proper that there be a big budget deficit”.

“[This year's budget] has allowed the government to let drops in revenue occur without needing to offset it in ways that would have made the impact deeper, but also by international standards it has taken fairly large measures to soften the impact of the international downturn, which in the short term has made the deficit bigger than it might have been otherwise,” he continued.

“I have no concern arising out of the deficits that are being run this year or next year - indeed to seek to do anything about those may have required decisions that would make the downturn worse.

“[But] I do have a concern about the medium-term outlook. The government's strategy of returning the budget to surplus by the middle of the next decade relies first of all on economic growth assumptions that - although not historically implausible - might prove difficult to achieve given the peculiar nature of the global backdrop against which those projections are set.

“The weakest assumption is that the government will keep growth in spending less than 2% per annum in real terms for a five year period, something which has only occurred once in the last 50 years and that was a period which included three consecutive budgets where the government would cut wages in real terms. 

“I am profoundly sceptical that any government will be able to maintain that sort of discipline over a period which includes two elections.”

Austrade chief economist Tim Harcourt agreed on the need for a budget deficit.

“You have to run a deficit now. You run surpluses in boom times and you run deficits now - I think most market economists agree with that,” he continued.

“The key spending in infrastructure will assist exporters and other businesses, because they have been screaming out for that even before the budget. 

“The important thing is that there is a structural plan to bring it back into surplus. Even the last three Costello budgets were structurally deficits - there was a big drop in commodity prices and tax revenue from company tax, which no government can do anything about.”

So is a recovery in three to four years feasible?

“I think they are saying we will be out of recession but unemployment will probably continue for some time,” Harcourt said.

“I am hoping the psychology will snap so people will invest again and unemployment won't get too high. I think the government is hoping for the best but preparing for the worst. They are saying that there could be rises in unemployment, so let's prepare for that and assist people who do get laid off.”

Boldly forward

According to Harcourt there are several factors that will contribute to the ongoing health of the Australian economy: the floating of the dollar, good momentum and a strong policy response.

“In the Great Depression, what did the Australian government do? It cut spending, cut the minimum wage by 10% and put up tax,” he recalled.

“[Now] we have had a government fiscal injection to keep wages growing in line with productivity and we are committed to free trade. 

“There is a global consensus that everyone should stimulate. We had a good balance sheet so we had a little bit of room to move, but I think there are some economic signs that China's stimulus is affecting the second and third tier cities - some of the industrial production is coming round which is good for Australian exporters of construction materials and infrastructure.”

ANZ's Eslake concurred, pointing out that there have not been widespread failures in the Australian system such as those seen elsewhere.

“The Australian government has not had to do a great deal - at least nothing too expensive - to stabilise the banking system,” he explained.

“Other governments have had to spend large amounts bailing out their systems and that hasn't been necessary here. 

“The downturn on the Australian economy has not made as big a mark here as the downturn in other economies, so the impact on revenue hasn't been as great and the government hasn't had as hard a task to offset it. 

“Also, because of where Australia has been in the global cycle we have been able to see this happening. It has hit us later than most other countries so the Australian government and the federal bank have been able to implement their responses in a more timely way, which has cushioned the downturn.

“By and large I think the response by the Reserve Bank and the government to the downturn has been pretty good.”

How Australia's role in the global recovery evolves is yet to be made clear, Eslake said.

“The International Monetary Fund says that recessions which are globally synchronised and follow a financial crisis usually entail slower recoveries,” he continued.

“The hope might be that the policy response to the global recession has 

also been unusually large and synchronised so that the upswing might be synchronised as well - that is the more optimistic case. 

“One constraint on that will be the need that governments see to restore sustainability to public finances, which for Western countries' governments will entail stringent expenditure cuts and increases in taxes. 

A concern on the part of central banks is that the unusually accommodative monetary policies they have been pursuing might give rise to inflationary pressures once the cycle picks up and therefore they see the need to retract things quickly. Both of those issues could slow the rate of recovery.”

So what is the path from here to recovery?

According to Eslake, the priorities are to restore productivity growth in the country and to put private and household finances back on a sustainable footing - while simultaneously managing the impact of climate change.

Winds of change

While the focus at the moment is very much rooted in the challenges faced by the global economies, it is important to consider the long-term impact of the financial crisis on the Asia Pacific's geopolitical landscape.

Consider this: what would happen if the United States took years to recover from 

the financial crisis, but China recovered quickly. If fighting breaks out in the region, who would Australia turn to?

Australian National University Strategic and Defence Studies Centre chairman Paul Dibb warned that the country may one day be forced to choose between historical allies and new economic partners.

“I fear that if this crisis is prolonged Australia will be more alone in a more unstable world,” he said. “[This would be a world] whose values we do not share - values we are not used to.”

But Austrade's Harcourt sees the country's growing relationship with China as an opportunity for business.

“China is more influential in the world, but economically it still can't get us out of the global recession on its own,” he pointed out.

“It is still an emerging economy. I think from time to time we exaggerate a country's importance - look at Japan in the 1980s and now we are talking about China.

“[Nevertheless] Australia has a strong relationship - Gough Whittlam went to 

China before Richard Nixon did - so I think there is that understanding. Economically people assume it is major companies like Rio Tinto and BHP Billiton benefiting, but the major traders with China are the small and medium size enterprises doing business with China - this is the untold side of the story.”

Brave new world

Hypothetically, if it all goes to plan, in five years time there will be a large amount of productivity generating infrastructure in place or under construction, Australia will have emerged from its recession (abeit the lingering impact of unemployment may still be being felt) and the sphere of influence will have shifted slightly from the West to the East.

What sort of regulatory framework will your company be operating in?

According to Deloitte director economics Cassandra Wilkinson there is a danger that a process of re-regulation - bringing in checks and balances to ensure that the same sort of finance system meltdown does not re-occur - will go too far and will stifle the development of new business.

“We run the risk of over-regulating in a reactionary way, and stymieing the kinds of ideas and risk taking that is fundamental to recovering into long-term sustained growth,” she explained. “We are still an economy which is trying to re-invent itself. Over time Australia obviously dig things up and sells them - that is not going to change any time soon - but it is important for our economy to be working on its transition.

“The next wave of growth will be driven by products and services, some of which have not even been invented yet - we need to leave space for people who are driven by ideas and prepared to take risks. The rules and regulations around capital raising are quite difficult to deal with and while it is often said that first businesses are always funded by families, friends and fools, you do need to make room for investment in the economy.”

There also needs to be a new level of understanding about the blurring distinction between amateurs and professionals, Wilkinson continued, citing the example of the publishing industry as one where a grey area has emerged between businesses and individuals.

“Even in science, they are outsourcing 70% of their R&D to places like universities - it blurs the line between amateur and professional scientists,” Wilkinson said.

“Blurring the line between amateur and professional business people is something that the regulatory framework needs to adapt to. We need to make room for amateurs to join the fray. Obviously that is risky and you are dealing with people who are not necessarily trained or experienced in all the legal framework and regulations, but you are also harnessing all this potential that can be lost in the process.”

Generation Why Not?

It is the nature of booms that they are followed by a bust, but the cyclical nature of business means that most analysts are not discussing how big the recession or financial meltdown is going to be - or is already - but rather what the next boom is going to be and how best to capitalise on it.

These are exciting times for entrepreneurs who are prepared to analyse the shifting landscape and set a definite course of 

action.

Set your compass 

• Experts predict negative growth for 2009, but the world economy to recover by 2010. Ensure your business is still in a position of strength to ride the upswing.
• Climate change discussions are here to stay. Businesses must ensure that their operations are streamlined both in consuming energy and producing waste. Now is the time to invest in green technology and sustainable products.
• China may not be the superpower everyone is predicting (think of Japan in the 1980s) but it will definitely have a growing sphere of influence over Australia. Does your business have ties to China or the ability to penetrate the Chinese market?
• Watch the regulation pendulum closely. Periods of de-regulation are often followed by re-regulation and extensive regulation can negatively impact innovation and capital raising ventures required for entrepreneurial endeavours.
•  Don't be afraid to take risks, but always make sure you fully understand the risk first.
• Be bold. Nearly every successful entrepreneur in history has used periods of downturn to consolidate their businesses and market share.