With uncertain times ahead for the world economy, 1,200 people flocked last month to Perth Convention Centre to hear ANZ chief economist Saul Eslake speak at the ANZ CCIWA Economic Breakfast.
As one of Australia's most well known economists, Mr Eslake laid out his opinion on where the global financial crisis was heading and just what the challenges and possible solutions could be.
Mr Eslake reminded WA business that 2009 would be a tough year for Australia, perhaps the most since the 1991 recession.
"This is a better country to be observing and feeling what the world is going through than any other," he said.
"The world economy is digesting the consequences of bursting of one of the biggest asset price and credit bubbles in history.
"Restricted access to credit, even at lower interest rates, and falling asset prices have turned into a vicious circle with significant adverse consequences."
Mr Eslake said the financial crisis was moving into a second stage beyond just problems of liquidity.
"Last year the primary problem was the lack of liquidity in the banking system," he said.
"The best measure of those difficulties was the spread between official interest rates and the rates banks paid wholesale for those funds. Gradually this problem is easing.
"There are significant and growing concerns about the solvency of many banks, whether they have sufficient capital to absorb write offs they will inevitably have to take and whether they have enough capital to meet the demands they are facing for credit given the closure of most of the other sources of finance.
"Increasingly the answer to that question is no, banks still do not have enough capital to withstand these losses and the demand for credit."
The IMF estimates over US$2 trillion will eventually be written off as a result of the global financial crisis.
Banks have so far relied on government capital to offset the impact on their balance sheets. Private investors are unwilling to provide the capital the banks need.
Despite early calls from some economists, Mr Eslake said it was too early to declare the financial crisis over.
"The US has been in recession for over 12 months, longer than the average post war recession," he said.
"Consumers and business are cutting down on discretionary spending. More than three million jobs have been lost in the US over the past 12 months."
More concerning for Australia is the slowdown being experienced in China, with many other smaller Asian economies also concerned as they watch imports to the country fall.
"China's slowdown is not solely due to deterioration in its export markets, but it also owes a great deal to the collapse of its own property and investment bubble,” Mr Eslake said.
“Unfortunately it came at precisely the moment when the rest of the world was suffering from the effects of the global financial crisis.
"China's imports are falling more rapidly than their exports so oddly their trade surplus is actually going up."
Mr Eslake said it was too soon to conclude that China’s economy would in short order return to 8% growth rates.
"There will be a significant rise in unemployment in China over the next 18 months and as a result concerns about social and political unrest," he said.
"Small Asian economies have sought in past years to replace exports to the US and Europe with China and are now similarly in trouble."
While the inflation demon has been the one dominating headlines in recent years in Australia, Mr Eslake said the threat of deflation was far worse.
"Deflation can render monetary policy impotent. If inflation is negative you can not have interest rates lower than zero and it is impossible for monetary policy to engineer a recovery," he said.
Mr Eslake, who has spent 13 years as chief economist at ANZ, was quick to point out the difference between a recession and a depression.
"The US, Europe and some Asian countries are facing a depression. This is not a recession that is just bigger and longer than the garden variety," he said.
"Pre-war depressions were almost always caused by busted asset cycles and governments did not have the knowledge or tools to fix them, so they lasted a long time.
"People may not be spurned by lower interest rates to borrow and banks may not lend to them. Tax cuts will not work in these circumstances because people are more likely to save them than spend them."
The US dollar has been a topic of speculation for many businesses and although some people look at it negatively, Mr Eslake assured that the situation was not as bad as it seemed.
"Some people are very bearish about the outlook for the US dollar. As dire as the situation in the US looks, in most other areas it is worse," he said.
"It is winning against other currencies almost by default. Despite the troubles in America, they are doing more to address them than most other countries."
But how will Australia fare in the downturn? Mr Eslake said it was remarkable how resilient the economy had been in the face of the dramatic deterioration of the world economy.
"Unemployment will inevitably rise but during 2008 that wasn't apparent at all and consumer confidence has held up remarkably well," he said.
"Australian consumers are still shopping and Australia may well be one of the few countries in the world not to have a quarter of negative GDP growth. We will find out in four weeks.
"Australia's housing market and banking system have been stronger and more robust than those in the US and Europe. House prices will ease, but at nothing like the rate in the US."
The price of housing is an influential economic factor and Mr Eslake explained why he thought prices would not collapse dramatically.
"Australia remains significantly short of housing, we do not have an overhang of people selling at any price because they can not pay their mortgage," he said.
"It is remarkable how few Australians got behind in paying their mortgages when interest rates were nearly 10%, so why will they default when they go possibly less than 5%?
"Where the biggest drop in house prices is occurring is in the more expensive suburbs where people have taken on large debts they can no longer sustain.
"The only reason would be a significant increase in unemployment. I doubt it will be on the scale of other countries.”
When it comes to unemployment, Mr Eslake explained that business would be hesitant to lose any employees.
"Employers have spent the last few years worried about labour shortages. They are not going to short sightedly throw people overboard because it may cost them in the long term," he said.
Access to credit has been a main challenge during the global financial crisis. Mr Eslake said Australian banks were continuing to lend, albeit on tougher terms and with more diligent credit standards than in the past.
He also praised the Reserve Bank for decisive action.
"The RBA has been doing what they can and acting with unprecedented pre-emptiveness," he said.
"Deflation is not as serious a risk in Australia as it is with other countries in the world. It is hard to fault the swiftness of the Reserve Bank's actions."
By Luke Nieuwhof
CCI Journalist