So much for business confidence being boosted by the election of a Howard Government. The Australian share market had its biggest one-day fall in four years yesterday with a 3.5 per cent fall. It was proof that events in the US affect the Australian economy as much as what the Australian Government does. The shock fall came after Friday’s fall on Wall Street which was the third-largest on record.
The reaction perhaps shows an underlying weakness in Australia’s financial position in that it is very susceptible to overseas changes and there is uncertainty about how or whether the new Government will deal with the raft of new wage demands. A more robust Australian would weather changes elsewhere better.
But there is no cause for enormous alarm yet. Share markets are notoriously volatile and sudden falls do not reflect genuine falls in the value of companies, rather that investors are moving to cash deposits because they think they can better returns there. Moreover, share markets tend to fall more quickly than they rise, because more people tend to sell in a panic than buy in frenzy. A sharp fall is often followed by modest gains as the cautious vultures move in. The main concern should be whether interest rates rise, thereby stifling economic improvements. The main lesson should be to make our economy strong enough, by reducing debt, so we are not to be tossed about by investors in New York while at the same time gaining the advantages of international trade.