BHP and Rio agree, Steve Keen is wrong.

by Michael Pascoe

posted on Oct 23 09:24am

Michael Pascoe

Economists can occasionally be dangerous things when radical or simply wrong ideas fall on fertile ground. Karl Marx, for example, never personally hurt anyone that I know of, but some of his ideas eventually helped cause incredible suffering and death.

Domestically, an associate professor at the University of Western Sydney, Steve Keen, is currently scaring the easily-frightened with especially dire forecasts about the Australian economy. Keen’s predictions aren’t taken very seriously by most economists, but he’s still enjoyed plenty of media attention, much of it unquestioning. Some of my media colleagues are happy to search out the most extreme and alarmist views - they make bigger headlines.

Keen is predicting the economic equivalent of the earth splitting open, spewing forth fire, toads and serpents, the seas turning to blood, the Four Riders of the Apocalypse loping off random heads and limbs and so on. He represents a tiny minority of economic opinion.

(Part of Keen’s appeal to populist media is that he has put his unit on the market, claiming housing prices are going to crash. As Rory Robertson, Macquarie Bank’s respected interest rate strategist, observed, Keen would have more credibility as a housing forecaster if he had sold his unit last year.)

Journalists can be as dangerous as economists too when they needlessly scare their audiences and perhaps provoke them into doing the wrong thing. I’m writing this on a flight to Perth and have just watched the Channel 9 Inflight News with a couple of prime examples.

There was doom and gloom story that treated the rash of redemption freezes by mortgage funds as if it news - it’s been going on for months. And the report used the sorry house of Citi Pacific as its main case study. Citi Pacific blamed Kevin Rudd - I think the over-geared Gold Coast outfit should look much, much closer to home for the root of its problems. Quite frankly, Citi Pacific was on the nose with the stock market before the sub-prime crisis hit.

More importantly, a serious young English reporter (well, young compared with me) filed a cliché-riddled yarn from Shanghai that gave the impression China might be grinding to a halt and that it would take the rest of the world down with it.

What rubbish.

China is slowing, but slowing from an unsustainably high growth rate to what remains strong growth in anyone’s language. The 9 per cent growth it recorded in the September quarter would of course be the envy of any other country - down from more than double-digit growth last year.

If you want to know what China is doing, turn to the experts, the two companies that are intimately entwined with the China story: BHP and Rio.

Last week Rio released its quarterly production numbers and included the comment that the expected re-bound in Chinese demand from the Olympics close-down looks like being delayed from the December quarter and was more likely early next year. That caused a sharp sell down of Rio and other resources shares.

It’s perhaps not accidental then that Rio’s chief economist, Vivek Tulpule, turns up in an interview in today’s Sydney Morning Herald putting a bit more perspective on those China remarks. As the SMH reports:

“He said the downturn in metals demand in China during the second half of this year had taken the market by surprise.

But he said China could next year surprise the market in a different way - once its economy rebounded, its metals requirements would be larger than most analysts were forecasting.”

This morning BHP released its quarterly production numbers. I’ve been keenly awaiting BHP’s China comments as I rate them the best source of intelligence on the China economy. The Biggest Australian didn’t disappoint:

“Consistent with the outlook statement given at our interim and preliminary results, China has not been immune to the global slowdown. Macroeconomic indicators show that Chinese growth has softened during the quarter, albeit from very high levels. We expect volatility and uncertainty to continue in the short term. Notwithstanding this short term uncertainty, we remain confident that the ongoing industrialization and urbanization of China and other developing economies will continue to drive strong longer term demand for our products.”

And that’s a key part of the reason why I think Steve Keen’s dark forecast is fundamentally wrong. There are other reasons, but that’s the bedrock - the China story is not dead, BHP and Rio agree on that.