It’s a credit squeeze, not a financial crisis: BIS

Despite the credit squeeze having a “disastrous” effect on business investment, BIS says this can be moderated through a rebounding residential housing sector and government infrastructure spending.According to BIS chief economist Dr Frank Gelber, over the next five years Australia will experience a “moderate downturn” followed by lingering weakness as business investment declines due to shortages in debt and equity funding.“Currently, investment remains firm as we finish the last round of projects across the board,” Gelber said.“However, the next round of projects has been slashed and business investment will fall sharply over the next two years,” he said.He said these indicators for falling business investment will not be present when the Australian Bureau of Statistics releases its Capital Expenditure figures this week.“Investment expectations always miss the turn of the cycle.”He said consumers and businesses have gone into saving mode, due to collapsing confidence.“Households aren’t spending for fear of unemployment and businesses are cutting costs; and the shock to demand is starting to hit profits and unemployment.“Fear of unemployment is self-fulfilling – we will probably see the unemployment rate approaching 7 per cent some time next year.”He said if Australia didn’t have to contend with plummeting demand, commodity prices and weakening exports, the lower interest rates may have buoyed the economy due to underlying housing demand and government cash injections.However, the credit squeeze has shrunk available funding for new projects, he said, “and that has slaughtered business investment”.Property development and minerals investment have been hit, however, Gelber claims the federal government’s infrastructure spending will help offset the weakness in business investment.“The ‘Ruddbank’ can help to put the finger in the dyke to contain the leakage overseas bank funding. “Investment, and particularly construction, is the primary growth driver for the economy.”He said the nation has seen the bottom of the residential cycle, with an upswing to begin next year.“The strength of the economy over the next five years will depend on the extent to which strong housing and government spending on infrastructure will offset falling business investment.”

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