Depression avoided by 'a whistle' – Keating

Former Australian Prime Minister Paul Keating believes we may have avoided an international depression, but said a turnaround in US bank lending is the unturned key to a recovery.

Speaking at the Count Financial annual conference in Adelaide this morning, Keating said “we have missed an international depression by a whistle — just by a whistle”.

While the world is seeing ‘depression-level damage’, early Government intervention, which Keating described as ‘profound and important’, had “saved this show going to depression-era outcomes”.

The good news, Keating said, is that we look to be in the “very early stages of a long recovery”.

A cautiously-optimistic Keating said there are now some encouraging signs emerging, such as an improvement in credit market spreads and an Australian share market that is “up 25 per cent since the low in early March this year”.

The US is showing signs of a turnaround in manufacturing, with stock-building picking up in that country, while Chinese growth is also on the rise.

“We are seeing an improvement,” Keating said.

But the recovery will be slow, Keating said. He pointed to a study undertaken by two Harvard economists who found that recessions with dual causes (such as the current financial system rupture coupled with a cyclical slowdown), last twice as long as other recessions, while recovery is half as fast.

On average, these “double-barrelled” recessions have a duration of three to four years, with share markets that are down around 56 per cent, Keating said.

“It’s hard to think that we’re going to beat that this time,” Keating said.

Meanwhile, Keating said the US Government was taking a “big risk” in releasing its bank stress-test results this week. If negative, the results could lead to a collapse in confidence in US banks, or if artificially positive, could lead investors to believe the system is phoney.

The international reaction to this report will be an important one, with Keating saying one of the biggest risks to the recovery is movement in the American lending system. Before a recovery can take hold, US banks must again start lending, and the US Government, under Obama’s leadership, must encourage this.

“This is the key matter left,” Keating said.

“If they do that we’ll be able to get out without having a depression, but that’s got to happen soon.”