News Service from House Harris

Recession is "cleansing process" for economies, Corbett says

SYDNEY, May 15 AAP - Former Woolworths chief executive Roger Corbett says recessions can act as a "cleansing process" in the economic cycle by weeding out bad companies that should be allowed to fail.

Mr Corbett, who is a board member of the Reserve Bank of Australia, said the exception to the rule are retail banks, which are too important for consumer and business confidence in the financial system.

"I think there is a place for recessions, as they are a cleansing process," Mr Corbett told a breakfast seminar in Sydney on Friday.

"Experience has shown that economies that don't allow that cleansing process to happen bounce along the bottom for a long time, as Japan has for the past 20 years."

General Motors, the biggest car maker in the US, was a company that should be allowed to fail because it was too expensive to try and change the culture of the company, Mr Corbett said.

But Mr Corbett also said there needed to be adequate social safety nets to support and retrain workers who would lose their job in the process.

Mr Corbett said the event that triggered the global financial crisis was the run on UK-based regional bank Northern Rock in September 2007, which eventually forced its nationalisation by the British government.

"The world lost confidence in the banking system at the sight of the Northern Rock bank run," he said.

The ongoing problems on bank balance sheets with toxic assets related to sub-prime and other high risk mortgages, were going to drag on the US and European economies for some time to come, said Mr Corbett, who is also a director of Walmart, the world's biggest discount chain.

"We won't see a recovery until the toxic assets on the balance sheets on those banks are removed."

In contrast, "Australia is in a different position," he said.

"The Australian banks are well managed and well capitalised."

Australia was also well placed to recover from the economic slowdown because of Chinese demand for the country's commodity exports, Mr Corbett said.

"Our enormous plus is our relationship with China, and we need to catch their coat tails and hold on," Mr Corbett told the seminar arranged by Pitt Capital Partners and Hall Chadwick.

"The mineral producing states of Western Australia and Queensland are likely to see demand rise significantly this year."

While Chinese exports have slumped because global demand dried up, the world's most populous nation has managed to boost demand at home through government stimulus, with retail sales and property and factory investment rising.

But he warned that it wouldn't be plain sailing for Australia in the near term.

"We will see increasing unemployment for the next couple of quarters and we may even see some negative quarters," he said.

"But fundamentally, there are some really positive signs, especially from the Asian community."

Mr Corbett said one such sign was the strength of Australian retail sales in recent times.

"I think retail in Australia has performed really well, and part of that has undoubtedly been the incentive program," he said.

"You've got to be careful at how much you have, and where its directed, and the last incentive was maybe a little wider than would have been wise, but in broad, it was necessary and has worked."

The federal government has announced two fiscal stimulus packages totalling $52 billion that included generous cash hand outs for many Australians.

A good portion of that cash has been spent on goods and services, recent economic data and commentary by a number of companies show.