CYPRUS THE NUMBER ONE COUNTRY TO ENJOY GROWTH THROUGH THIS YEAR

Cyprus rarely makes the news. But it’s name is up in lights - and for just one really good reason. When the International Monetary Fund released its latest dire forecasts for the global economy last week, there was only one country in the developed world expected to enjoy growth through this year.

And that country was Cyprus.

The IMF reckons the island nation of about 850,000 people will grow 0.3 per cent this year and 2.1 per cent next year.

Why, when every other country in the developed is going backwards, is this speck of a place growing?

The Cyprus High Commission highlighted its financial links to the Middle East (it had grown into a financial centre since the fall of Lebanon in the 1970s), its strong tourism industry and the “balanced” way the place is run.

“It has been sane,” one official said. “We don’t have exposure to those sub-prime mortgages.”

But even in this economic oasis, growth of just 0.3 per cent is pretty poor. It is just that in comparison to the rest of the world, it’s startlingly good.

Which brings us to Australia, which is predicted to contract 1.4 per cent this year before pumping out an absolutely underwhelming 0.6 per cent in 2010.

Frighteningly, Australia’s figures put it as the second strongest developed economy over the next two years behind Cyprus.

It could be worse. Much worse.

Bottom of the table is Ireland. The Celtic Tiger’s economy will be cut down to nothing more than a stray cat, after three consecutive years of negative growth (minus 2.3 per cent, minus 8 per cent, minus 3 per cent).

Unemployment is tipped to climb to 7.8 per cent in Australia by next year. That equates to at least an extra 250,000 people out of work, although based on the IMF’s own growth forecasts this might be light by 100,000 people or so.

Again, there’s much worse beyond Australia’s shores.

 Unemployment is tipped to reach a mind-boggling 19.3 per cent in Spain, 13 per cent in Ireland and be firmly in double-digit territory in the US, Germany, France, Italy, Belgium, Greece, Portugal and the Slovak Republic.

In other words, almost a third of the developed world will suffer 10 per cent plus unemployment. (It’s better, again, in Cyprus where unemployment is tipped to peak at 4.6 per cent.)

Why all these figures and forecasts?

Well, it puts into stark relief a couple of things.

The first is that this global economic meltdown still has a furnace beneath it. If you remember the 1990-91 recession (when the economy shrank over 15 consecutive months and unemployment neared the million mark) then sorry — they were the good old days. The current downturn is fast approaching and, if the forecasts prove correct, will surpass the 1981-83 recession.

On that occasion, the economy shrank close to 4 per cent. That was the perfect storm of a recession, where the end of a mining boom collided not only with a drought (when farm industries were a much larger part of the economy) but also a global downturn.

Unemployment peaked at 10.4 per cent, or more than 730,000 people, in September 1983.

Clearly, we are in waters that would confuse James Cook.

And that’s why the coming Budget will stun us. Not just in terms of the size of the Budget deficits. The quantum of those deficits will be unlike anything we’ve ever seen, although if you measure them against GDP they will still be smaller than those run up by the Whitlam and early Fraser governments (and nothing compared to those of World War II).

But the policy choices will be extraordinarily difficult and will require a level of creativity missing from Australian economic debate for much more than a decade.

Does Treasurer Wayne Swan hold tight and let his existing stimulus programs stand? Or, is the global economic picture so dire that he pushes ahead with even more spending? There’s the legitimate question of whether any more spending will achieve much and, if this recession truly is the Great Recession (or the 21st Century’s Great Depression), should some cash be kept on hand for when things get even worse.

Balancing these competing issues means Mr Swan, Finance Minister Lindsay Tanner, Prime Minister Kevin Rudd and Deputy PM Julia Gillard (the gang of four who are pulling together the Budget) have to really think outside the box.

Means testing certain welfare payments, overhauling some tax arrangements . . . sure, they will be part of this Budget, but the Government will have to go much, much further.

All the same, the deficit and long-term borrowing has to be front and centre (particularly for Finance Minister Tanner).

And here TD Securities global strategist Stephen Koukoulas has some interesting points.

He makes the point that for a long time, fiscal policy — government spending and the such — had become as popular as “purple flares” but the current crisis is not going to be resolved by hip and cutting-edge monetary policy.

That much is clear. With interest rates at zero in some countries there is nothing else to lean upon but government balance sheets (and the balance sheets of central banks).

But the story is slightly different here in Australia.

The Reserve Bank has official interest rates at 3 per cent — among the highest in the world.

His worry is that the rush overseas to government assistance will be replicated by the Rudd Government, and not give the Reserve a chance to flex its policy muscle.

“Cutting interest rates does not cost the taxpayer (and future taxpayers) one cent,” he said. “It’s free! It helps to boost demand, boost investment, boost spending and, via a lower-than-otherwise Australian dollar, it boosts exports.” Of course, there is only one problem with this notion. Super-low interest rates (accompanied by terrible borrowing practices) sowed the seeds for the recession. Obviously, there are just no easy answers to any of this. Ah, to be in Cyprus.

27th April 2009, 15:00 WST

"THE WEST AUSTRALIAN"