Thu, Mar 05, 2009 page10

• Australia facing recession, analysts say

  DEEP IMPACT Analysts expect rising unemployment, falling profits and deep rate cuts, while the treasurer said the world economy would get worse before it improves

  • AFP
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  Australia stands on the brink of recession after shock figures showed the economy shrank for the first time in eight years as the country succumbed to the global downturn, analysts said yesterday.

  The economy contracted 0.5 percent in the December quarter, well below market expectations of 0.1 percent growth, official data showed, ending a long run of expansion on the back of a China-driven resources boom.

  The reversal came despite government attempts to kick-start the economy with two stimulus ­packages worth more than A$50 billion (US$32.5 billion), sending currency and share markets plummeting.

  While the economy grew 0.3 percent for calendar 2008, economists said the slip into negative territory dashed hopes Australia could avoid the global recession.

  Analysts said Australia could expect a sharp increase in unemployment, falling company profits and more deep cuts to interest rates from the central bank over the next six to 12 months.

  Australian Treasurer Wayne Swan said the contraction was ­“sobering but unsurprising” in a global environment likely to get worse before it improves.

  “Although the Australian economy has held up better than most other economies, the inevitable impact of the global recession is clearly evident in today’s data,” he said.

  Swan said the contraction would have been worse without the government’s stimulus measures, an initial A$10.4 billion in December followed by a second A$42 billion package that is still being rolled out.

  Markets reacted nervously, with the Australian dollar briefly slipping almost US$0.01 to below US$0.63 after the announcement and the benchmark SP/ASX200 share index closing down 1.64 percent.

  “The market really wasn’t expecting this,” Bell Direct analyst Julia Lee told Sky News. “A fall of 0.5 percent is quite significant ... we’re seeing a severe reaction on the market. It’s really starting to price in a recession in 2009 and probably not a recovery until maybe 2010.”

  Better-than-expected interna­tional trade and retail figures released on Tuesday had fueled market expectations the economy may repeat the 0.1 percent growth recorded in the September quarter.

  But AMP Capital Investors chief economist Shane Oliver said the size of the downturn, worse than the most pessimistic forecasts, left no doubt there would be a recession, usually defined as two successive quarters of negative growth.

  “It probably has another six to 12 months to run,” he said. “The global slump has yet to really hit our exports and leading indicators are continuing to slide ... it’s going to be a pretty rough ride over the year ahead.”

  Oliver warned unemployment would hit 9 percent, with company profits dropping up to 30 percent.

  The realization that the economy was going backwards left the Reserve Bank of Australia (RBA) with little option but to implement further interest rate cuts, Oliver said, predicting they would fall to 2.25 percent by year’s end.

  The central bank left rates on hold at 3.25 percent on Tuesday as it waited to see if the government stimulus packages and previous rate cuts totaling four percentage points since September would insulate Australia’s economy.

  RBA Assistant Governor of Economics Malcolm Edey said shortly before yesterday’s figures were released that Australia would suffer some significant short-term weakness.

  “The international deterioration has been so abrupt that it won’t be possible to avoid some short-term weakness here,” Edey told a business forum in Sydney.
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