WORLD markets are in meltdown mode as a “perfect storm” of factors combines to create a toxic mix of political and financial instability. A repeat of the global financial crisis seems to be in the offing.
The problem is, this time around, it could be even worse.
Back in 2008, governments around the world had money to spare to throw at stimulus programmes, and interest rates were comparatively high, giving central banks room to cut rates and boost consumption.
But now, in the northern hemisphere at least, rates are already at record lows, while billions, even trillions of dollars have already been spent on trying to kick-start ailing economies, with very limited success.
The global recovery is grinding to a halt as economic growth in Europe and the US is slowing to a snail’s pace, even after the stimulus programmes and near zero rates. There are simply no other bullets left to fire.
And that is the fear that is underpinning all of this panic: that the world is heading back into recession, with no policy ammunition it can use to soften the blow.
The bright side is that if there is one country in the developed world you would want to be right now, it’s Australia - for two important reasons.
Firstly, we have plenty in the tank to help stimulate the economy if the government and Reserve Bank decide they want to. Our interest rates, at 4.75 per cent, are the highest in the developed world, and with such little debt, the government could afford to embark on another stimulus programme if it wanted.
Secondly, our resources boom is more firmly entrenched than it was in 2008, with more projects under way, and China’s boom still in full swing. Moreover, most of the raw materials we export to China are used to service its domestic economy – its property market, for instance. And that is in rude health.
On the flip side, the US and Europe are China’s biggest export markets, so China will definitely be damaged by a return to recession in the northern hemisphere. No region in the world is completely immune.
There are also crucial differences in Australia compared to three years ago. For a start, our domestic economy is much weaker, with households less willing to spend. Our retail sector is hurting, as are our manufacturing and tourism sectors, which have been smashed by the strong dollar.
That means they are less able to withstand another sharp downturn, and may end up shedding more jobs than they did during the GFC if this situation deteriorates.
“We are a lot more vulnerable than we were in 2008, even though we have more ammunition than any other developed economy” said Saul Eslake, economist at the Grattan Institute. “That said, we have a lot more money to spend on stimulus, although we will have to give up on the idea of returning to surplus anytime soon.”
However, there is no guarantee that a similar stimulus programme would work as well this time around. Would people use the money to borrow more and spend more like they did two years ago? And if we sent out more $900 cheques, would people spend them, or simply save them, fearing for their jobs?
These are questions that will worry many Australians who are already struggling with their businesses, or watching their superannuation funds lose much of the growth they have achieved over the past year, perhaps forcing yet another delay in retirement.
But whatever your circumstances, the best advice remains “do not panic”. This is not the time to make kneejerk decisions. The dust could settle on this quite quickly.
These are my tips for avoiding expensive mistakes.
* Don’t take big financial risks
When markets are wild and risky, it’s time for you to do the opposite. Don’t go out on a financial limb for anything.
It’s not a time to take out a whopping big loan on a flash new house or start a new business which needs a lot of cash. If this is the start of a new GFC, you don’t want to get caught owning something new (using someone else’s money) if values go down.
* Stick with quality
If you haven’t learnt this already then now is the time to start. Quality stocks and other assets will always drop less in downturns and turnaround faster with the inevitable recovery.
Don’t get suckered in to dodgy investments because they invariably get wiped out when the crunch comes.
* Check which superannuation option you’re in
Most superannuation funds offer a range of different options which follow various investment strategies... from conservative to high risk. So many people opt for the best performer which, during boom times, are the specialist share funds.
The only problem is the specialist share options usually take the biggest hit in a bust.
Talk to your fund manager about making sure you’re in the right option for your circumstances which might be a more conservative balanced of capital guaranteed fund.
If you own a small business, I invite you to read my recent article: Market Meltdown: a small business survival guide.
Follow David Koch on twitter @kochies_biz
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