Tim Harcourt

The World Bank has warned that the world risks a deeper recession than the GFC in 2008-09, and economic forecasts for the whole world have been downgraded.

A threat of recession from Europe is unnecessarily affecting Australia’s global prospects.

We need to ensure that fear of a double dip recession doesn’t become a self-fulfilling prophecy. Europe has its debt problems, but Australia’s economic fundamentals are sound and much of our trade ties to China, India, ASEAN and the emerging economies are based on energy, food, and major industrial and infrastructure needs. The long term demand fundamental will out swamp the short term jitters in financial markets.

I have just returned from China and India en route to Brazil, and in these countries it is clear there is a real danger in a spill-over from Europe’s debt problems and slowdowns in key countries such as India that threaten growth.

The World Bank slashed India’s forecasts from 8.5 per cent to 6.4 per cent, yet India’s trade exposure to Europe is less than China’s. In addition, both China and India now have large affluent domestic consumer markets that will help stem the European tide. Even before the collapse of Lehman Brothers, global economists knew that America had ‘too many shoppers and not enough shippers’, whilst China had ‘too many shippers and not enough shoppers’.

The US-based World Bank says that after six months of slowing economic activity, growth in the global economy is likely to be 2.5 per cent in 2012 and 3.1 per cent in 2013. It warns that Asian growth nations fuelling Australia’s prosperity could be dragged into the mire, in a move that would have severe ramifications for the domestic economy.

As these global structural imbalances are addressed, and China moves its economy from export dependence to domestic consumption and investment, we’ll see a natural movement to the emerging economies away from the northern hemisphere. For Australia that will be good news as the countries in our region will do more of the heavy lifting in terms of global growth and the famous ‘tyranny of distance’ will be replaced by the ‘power of proximity’.

Tim Harcourt is the JW Nevile Fellow in Economics, Australian School of Business, UNSW and author of The Airport Economist.