News Room - Business/Economics

Posted on 05 Mar 2009

Economy in reverse, but for how long? (Australia)

AUSTRALIA'S economy is going backwards, with economists now questioning just how long and deep the slowdown will be.

 

National accounts for the December quarter reveal the economy slumped 0.5 per cent, in stark contrast to the market expectation of growth of between 0.1 and 0.5 per cent.

 

Westpac chief economist Bill Evans said it was "bizarre" to see such a sharp cut in spending on goods ranging from cars and clothing to cigarettes and alcohol, given the big cash handouts.

 

Despite the injection of $8.7 billion into bank accounts from the government's first fiscal stimulus package, consumers tightened their belts, with spending rising only 0.1 per cent.

 

The household savings rate surged to 8.5 per cent from 3.4 per cent with actual savings leaping from $5.7 billion in the third quarter to $15.1 billion.

 

"Expect the RBA to continue to cut the overnight cash rate to a low of around 2 per cent and we also anticipate a further substantial fiscal stimulus from the Budget in May," he said.

 

The surprise GDP number rippled through the share market yesterday, with nervous investors bailing out on the news.

 

"There was a huge drop," said CommSec market analyst Juliette Saly. "The market was down about 30 points . . . and then we saw it drop about another 30 immediately after the figures were released."

 

The market recovered some of that ground, with the S&P/ASX 200 closing down 1.6 per cent yesterday - its lowest point since August 2003.

 

Some economists warned that the economy was likely to contract for the rest of this year.

 

"Unemployment will be up to something like 7 per cent by the end of 2010 and in that sort of world it's tough," said NAB chief economist Alan Oster.

 

"2009 for the globe is going to be the worst year since World War II."

 

Mr Oster, who believes Australia's economy will shrink 0.25 per cent this calendar year, said growth should begin to return by the end of the year.

 

JP Morgan economist Helen Kevans said the Government's $42 billion fiscal plan would "take up some of the slack" in the current quarter but another growth slump was on the cards.

 

"We forecast another negative GDP outcome in the first quarter 2009, which will satisfy the technical definition of a recession," she said. "The extent to which GDP falls . . . will depend on how the economy responds to the significant monetary and fiscal policy stimulus delivered in recent months."

 

Other economists said Australia might avoid a technical recession -- two consecutive quarters of negative growth -- if businesses boosted their spending on inventory.

 

Warren Hogan, ANZ's head of Australian economics and interest rate research, said: "If we do get an inventory rebuild then we would expect to see a strong positive contribution to GDP from the inventory component in the coming quarter.

 

"This could see a small rise in GDP and technical recession averted again."

 

News of Australia's economic slump came as growth in the services industry recorded a further slide.

 

The Australian Industry Group-Commonwealth Bank performance of services index posted its 11th straight fall as consumers cut back spending.