Jennifer Hewett, National affairs correspondent | January 24, 2009 Article from:  The Australian

The rest of the year is not going to be much fun. Think jobs evaporating, businesses closing, share dividends disappearing, superannuation shrinking, housing prices falling, the market plumbing the depths again. China, so recently our reliable economic driver, is now reversing us back down the hill at full tilt.

No wonder Kevin Rudd has been preparing the national psyche for its big day with a series of increasingly sombre speeches around the country.

He is now warning that 2009 "will test the very fabric of who we are as a people and as a nation".

What was that about needing a beer? The country is coming out of the haze of January torpor to be jolted by the equivalent of economic shock therapy. Bad news everywhere you look.

The Government will officially announce today its latest rescue package, the equivalent of Ruddbank for the commercial property sector. If foreign banks pull out of their syndicated loans on commercial property such as shopping centres and office blocks, the Government will be there to help out with up to $30 billion in refinancing, mostly paid for by government bonds. The big four banks and the Government will put an initial $4 billion into the fund.

The idea is to plug any financial gap the Australian banks can't meet, supposedly preventing unnecessary dislocation, job losses, forced sales and write downs on commercial property.

It's part of Rudd's mantra that the Government won't sit on its hands while things are going wrong. That's even if most Australians actually spent this summer sitting in the eye of the storm.

Last year was turbulent, often frightening, but the practical impact of that was yet to really hit home. The devastation being wreaked in the US and UK looked dire but could still be viewed from a comfortable distance.

Here, the China story was looking more threadbare but it was still being followed. Domestically, interest rates and petrol prices were heading down and down. The supermarket aisles were full of specials with Rudd's $1000 Christmas present to help smooth the bumps. Yes, unemployment was up, but not by much unless you counted investment bankers and who cared about them? Superannuation statements were grim reading but only devastating for those nearing or in retirement.

The problem was more fear of the future than the reality of the present.

But by now, the problems are all becoming much more concrete, much closer to everyone. They haven't gone away while we were on holidays, resolutely ignoring nasty news. Being in denial is no longer an option. The problems have only grown so much larger.

Last week alone, the roll call of big job losses was staggering. It ranged from BHP's Marius Kloppers giving up on 2000 jobs, billions of dollars and priceless employee dreams at the newly opened Ravensthorpe nickel mine in Western Australia to Mark McInnes at the upscale David Jones culling 150 jobs in Sydney, warning of the worst retail outlook he has seen and cancelling the traditional glamour fashion parades.

All bad enough in isolation. In fact, these are just the symptoms of a year that is starting badly, with the only certainty it will get worse before it gets better. Whenever that may be is anyone's guess.

The consistent message to be taken from most economic and expert forecasting is how inadequate the predictions have been. Unfortunately, the usual mistake has been to be far too optimistic about growth prospects.

Prominent economic research house Access Economics, for example, received considerable publicity last week with its dire warnings about the coming recession and the consequences for the "buggered" budget. Less remembered was that this time last year, Access Economics' forecasts were focused on the dangers of inflation, fuelled by what it considered ill-advised tax cuts and the enduring strength of the construction and mining industries.

Now the International Monetary Fund says it is preparing to next week slash its estimates for Australian growth rates to just above zero.

And that was even before China confirmed last week just how quickly and dramatically its supposedly irrepressible growth had slowed in the last quarter of 2008. So much for all the sophisticated stronger-for-longer theories on the global resources boom.

The Australian stockmarket hit a new five-year low on Friday, sliding past the previous November depths and down a further 4 per cent or more in preparation for the long weekend. Happy Australia Day.

January 26 also happens to be the start of the Chinese New Year: the Year of the Ox. The Ox will clearly have a much heavier load to pull. Let's all hope it can at least keep moving forward, even slowly, with all that additional pushing by the Chinese Government. But no guarantees. Australia's other big Asian trading partners are also suffering.

"Data this week has seen a significant intensification of the global economic slowdown in Australia's neighbourhood, with the economic news out of Asia exceptionally bearish, including for China," says Citibank economist Stephen Halmarick. "The highly synchronised nature of this global economic downturn and the truly appalling economic news since the start of the year is likely to have surprised the Reserve Bank of Australia on the downside (as it has us)."

But certainly the Australian Government is now well aware of just how devastating the coming year is likely to be, particularly the impact on jobs. It will dominate every meeting of cabinet.

Finance Minister Lindsay Tanner says bluntly that the the Chinese growth figures are bad news for jobs in Australia and that the nation can no longer rely on the turbocharge it got from China over the past several years.

The direct correlation of that turbocharge from the mining boom to national economic health may have been less obvious to people in Sydney and Melbourne than people in Perth or Brisbane. But they benefited enormously just the same.

Now they are going to quickly realise what its absence means. The Lucky Country just had an abrupt reversal of fortune.

The Government's political priority is to persuade people that it is acting pre-emptively and competently to head off as much of the (imported) pain as it can. It must look as if it's ameliorating rather than exacerbating the sense of financial chaos.

Labor will benefit from the fact that scared voters will be looking for leadership. Faith in more government action and better regulation - as opposed to leaving it to a discredited free market - is very much back in vogue. We are effectively part of one of those historic shifts in economic direction and political fashion as the pendulum swings back from the market excesses of the past two decades.

This will all neatly complement Rudd's general philosophy. The costs will come later. The original $10billion handout came and went without any lasting impact but who's complaining? Clearly, the era of budget surpluses is well and truly over. Not only will there be a lot more government money being spent, there will be far fewer taxes coming in. But for now, it's a matter of whatever government action seems necessary, no matter how unprecedented. These are, after all, unprecedented times.

Rudd has been trying to finesse the tactics always employed by politicians facing a major crisis. He is warning of how difficult life will be but insisting that Australian resilience and strength and values will "see us through".

He also cites "the rebirth of American leadership" as a crucial new ingredient in this mix and unashamedly tries to link the approach of his Government to the Obama magic.

But despite a surge of global enthusiasm for the new inhabitant of the White House, there's little evidence so far that President Barack Obama's rhetoric will do more than bathe economic misery in a more poetic light.

The latest US housing figures released yesterday show that housing starts for December showed another huge decline of over 15 per cent, well below expectations and confirming conditions not seen since the 1930s. Microsoft also announced yesterday it would lay off 5000 people over the next two years, the first time it has done so in its 34-year history. It won't give predictions for the next six months other than to say it will be worse.

But behind all this immediate gloom is the deeper and even more serious problem of a struggling global banking system.

Business closures and job losses are like the loss of limbs: painful, possibly crippling but survivable. Banks are like the heart, pumping though the money that keeps the economy functioning. If that heart stops pumping, you're dead.

And that has been the big threat terrifying governments around the world, leading to the various government rescues or guarantees for their banks several months ago.

In the US and UK in particular, it featured injections of billions of dollars directly into the banks. Now for the really bad news of 2009. It is becoming apparent that the medicine doesn't seem to have worked well enough.

It has kept the banks alive, sort of, but semi-comatose. With the poison - trillions of dollars in bad and doubtful assets - still stuck in the system, the banks are still not willing or able to lend. That's even assuming they can find businesses willing and able to borrow rather than cutting back.

Instead, many of the global banks are announcing tens of billions of dollars in new losses. It's hard to overestimate the significance of this continuing sickness.

Last Monday, the British Government had to announce a whole new pound stg. 350 billion ($742billion) bank rescue package as the Royal Bank of Scotland declared it would incur an annual loss of up to pound stg. 28 billion. It is now 70 per cent owned by the British Government and everyone believes the Government will end up owning all of it and perhaps a few others previously presumed impregnable. In the meantime, it's offering a new insurance system for bank assets that may - or may not - work. Reaction so far is distinctly underwhelming. Housing repossessions are still expected to mount with the country officially in recession.

The situation in the US banking sector is little better with the once mighty Citigroup being dismembered and the Government is taking on responsibility for billions of dollars of its debt. Bank of America, which was supposedly one of the stronger banks, only hurt itself by taking over Merrill Lynch, meaning the Government has had to pump in an extra $US20 billion ($31 billion) to help pay for it on top of the $US25 billion the taxpayers had already forked over.

It means the Obama administration is considering a new approach to set up the equivalent of a government-owned "bad bank" to take over the bad assets of the banks. Taxpayers and Congress will just love that idea. Their dilemma is, of course, that a more politically palatable but financially effective alternative isn't evident.

All this is inevitably going to cause growing difficulties in Australia. It's not just that local banking shares have been massacred anew over the past week in reaction to the fears about the stability of the whole financial sector as well as the prospect of the banks being caught with more bad debts as the economy falters. It's how they will navigate the year ahead.

The Government and the banks have proudly emphasised that Australia's banks are in good, well-regulated shape with few of the bad-lending practices found elsewhere. But everything is relative. Canberra's pro forma language has gone from reiterating endlessly last year that the Australian economy is not immune to the global crisis to emphasising how exposed it is.

That means the Government has also become increasingly concerned about the flow of credit through the economy. Like governments elsewhere, the usual exhortations about being responsible about saving and cautious about borrowing have been replaced by the opposite message. Spend, spend, spend. Similarly, the banks are being urged to lend, lend, lend. But this is proving unpersuasive to people worried about jobs and bankers worried about bad debts.

The Government also knows that no matter what economic stimulus packages are unveiled, no matter how many job creation programs there are and no matter how much further the Reserve Bank cuts interest rates again next week, it won't do much if the use of credit is frozen. The Australian revealed that the Government had been finalising plans to effectively become lender of last resort to the commercial property sector via a special fund. The rationale is that many of the foreign banks that help finance the development of Australia's shopping centres and office blocks to the tune of $45 billion may pull back from rolling over loans here.

The Government is extremely sensitive about this being seen as a waste of taxpayers' money or a bailout of bank's overvalued assets, as Malcolm Turnbull describes it. But it's even more sensitive about being caught in another potential crisis without having a plan to deal with it. It's all hands on deck, all money on the table. "We are all in this together, within Australia, across the world," says the Prime Minister. Australia will spend this year trying to digest the results. Good luck, and pass the snags.

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