License article

It was the ideal time to be confused …

Charles Dickens was never big on economics but he summed up the collective mood of Australians with his novel A Tale of Two Cities. It begins with the immortal line: ''It was the best of times, it was the worst of times.''

Right now, the opinions of many forecasters and certainly all our politicians are neatly encapsulated by that single line.

For depending on whom you believe, we either are headed into the stormy abyss of economic chaos, weighed down by an insurmountable debt burden, or steaming our way steadily towards a golden future.

Whom should you believe? Perhaps the least credible commentators are those with definite answers, who posses the absolute certainty of their own convictions.

As for the rest, they keep changing their minds so quickly - in response to almost daily developments - it is nearly impossible to keep up.

Perhaps Dickens should have started with a simpler line: ''It was a bloody confusing time''.


Just sit back and consider the events of the past fortnight. First, in response to shock inflation figures for the March quarter, the Reserve Bank slashed interest rates with the biggest cut since global finance went into meltdown in 2008.

Those figures spooked everyone for they appeared to show, superficially at least, the Australian economy cooling far quicker than anyone anticipated. The experts were almost unanimous that rates would be cut again within weeks.

Then on Thursday, after months of mass sackings, the tipsters were eagerly awaiting the employment numbers, absolutely convinced that jobless numbers were on the rise, which would confirm the anecdotal evidence and be a logical follow on from the sharp drop in inflation.

Except, er, unemployment fell to its lowest level in a year, back under 5 per cent, confounding money markets and creating a few embarrassing moments for the soothsayers.

Remember all those ''interest rate cut a certainty next month'' stories from last week. Apparently, that's now off the table.

Part of the problem with this knee-jerk market reaction and commentary is that the headline numbers on these statistics often tell a vastly different story to what is contained within the detail.

Take the March quarter inflation figures for example. At face value, a mere 0.1 per cent rise from the December quarter - which in turn registered a zero rise in prices - could be interpreted as an economy that is stalling.

But a little digging reveals wide swings in the various components of consumer prices. One the one hand, we saw big rises in the cost of domestically produced goods and services including pharmaceuticals, education, fuel, health and rent.

These were offset by large falls in the price of fruit, overseas travel, audiovisual and computing products and furniture.

If you exclude fruit - where prices were recovering to normal levels after last year's cyclones and floods - those trends tell you domestic inflation is relatively strong but the overall figure has been skewed by lower prices for imports as a result of the strong Australian dollar.

On the employment statistics, that surprisingly solid headline number - that had financial markets bears suddenly turning bullish - concealed the fact that growth in part-time workers outstripped a fall in the number of full-time workers.

On top of that, it would appear a large number of people simply gave up looking for work and so were not registered as unemployed. So again, the details tell a different, and far less clear, story than the headlines suggest.

The other problem with some of these statistics, particularly those collated on a monthly basis such as unemployment, is that they are estimates that usually are revised further down the track. So they can be pretty unreliable.

If this all sounds confusing, you are not alone. Even the Reserve Bank has admitted that it got it wrong.

Midway through last year, it was anticipating the economy to be steaming along and it has been caught a little off guard by the less than robust growth it had predicted.

While most of the news this week was dominated by mindless chatter about whether the budget will deliver a sliver of surplus in 13 months' time, a couple of simple facts were overlooked.

The first is that a budget is merely a wish-list, a set of intentions. It is not something set in stone, a pre-ordained outcome, and whether it is one side of surplus or not is irrelevant. The major factor is whether fiscal policy is expansionary or contractionary, whether the government is pumping money into or taking money out of the economy.

For while the federal government controls fiscal policy, it doesn't have absolute control over its spending or its revenue and so therefore can never guarantee the ultimate result.

To a large extent, global events dictate that. If the world has some kind of miraculous recovery, our economy will perform better than expected, making a surplus a real possibility as spending drops and tax revenues rise.

But miracles, by their very nature, are rare. And after the events in Europe during the past week, the global outlook has become as unstable and precarious as ever.

Greece may not be able to form a government and hence its bailout package is in jeopardy, the new French president has eschewed the concept of austerity as a fix for Europe's woes, a Spanish bank applied for a partial bailout and the future of the single currency once again is under a cloud.

Recession clouds and mass unemployment hang across the eurozone and even Britain has slipped back into negative territory.

The immediate danger from the European debt debacle, should it again spiral out of control, is its capacity to spark yet another banking crisis.

European banks could probably cope with a formal default by Greece. But if Spain or Italy were to deteriorate further, neither the International Monetary Fund nor the European Union would have the reserves to bail them out, causing bank failures that would disrupt global finance.

Considering how eurozone leaders battled to gain control of the Greek debt crisis, a tiny economy on the eurozone fringe, a similar situation in one of its larger member nations would prove fatal for the EU and the single currency.

The secondary danger from Europe is its effect on the global economy. Europe is China's biggest export market and China is our biggest export market. That's only two degrees of separation for us.

The political and social upheaval within the eurozone is likely to exacerbate its economic problems, leading to much slower growth in China and hence Australia.

On the bright side, we merely debate the rate of growth. Much of the developed world questions whether there will be any at all.