Tuesday, August 12, 2008

Our Reserve Bank is worried, perhaps even frightened

What if it all falls apart?

Australia’s Reserve Bank has expressed deep concern about Australia’s economic outlook, presenting forecasts that suggest it might have lifted interest rates too high.

Its latest Quarterly Statement predicts that economic growth is about to slow to a crawl and that unemployment will climb to 6%.

And the Bank warns that while these are its central forecasts, any further deterioration in the global outlook could lead to a “significant deterioration” beyond those forecasts.

The Bank says that Australia’s annual rate jobs growth, at present 2.3%, will slow to three-quarters of one per cent almost straight away. The forecast implies a jump in Australia’s unemployment rate from 4.3% to 6% by the end of next year...

Australia's rate of economic growth, at present 3.6%, is forecast to slow to 2% by the end of this year, with around half of that coming from the mining and farm sectors, implying an anaemic 1%growth rate in the rest of the economy.

Westpac's chief economist Bill Evans said the Reserve Bank seemed to be "shocked" by the severity of the slowdown that it had helped engineer.

"It's worried about the global outlook and concerned that that financial turmoil could exacerbate the slowdown," he said.

The Bank said that some of the downward revision in its forecasts was due to the explosion at Western Australia's Varanus Island gas plant which had cut that state's gas output by one-third and would knock 0.25 per cent off national economic growth.

However it said there had also been "a sharp slowing in credit expansion to both households and businesses" as private lenders had pushed up their interest rates by more than it did and toughened their lending standards.

Housing loan approvals had fallen 20% since the start of the year and business loans were growing at an annualised rate of just 8 per cent - well down on the 17 per cent growth rate at the end of last year.

The Bank said that retail spending was falling in real terms, as were sales of motor cars and consumer and business confidence.

Lending finance figures released Monday lent weight to the Bank's Statement, posted their biggest slide in 16 years.

Total lending slumped 13.3% in the year to May, the biggest annual decline since January 1992 when Australia was emerging from a recession.

The Bank pushed up its inflation forecast in the Statement, saying it now expects the headline rate to peak at 5 per cent in December before easing back to 3 per cent
by mid 2010.

However it has indicated that this will not stop it cutting interest rates, saying that so long as the economy remained subdued it saw the scope for rate cuts "increasing".

The Bank is expected to cut its cash rate by 0.25 per cent when its board next meets on September 2, the first such cut for seven years.

A member of the Reserve Bank board, former Woolworths' chief Roger Corbett told Sky
News yesterday that while the global financial crisis was serious, Australia was "resilient" and had a very strong broad base.

2 comments:

Anonymous said...

if that is the case then inflation was fall much more than forecast

Anonymous said...

The concern that is apparent in their comments again leads me to question why they did not cut interest rates this month?

Retail sales are going backwards. Consumer confidence is near 16-year lows. Business confidence is also at similar lows.

I hope they know what they're doing.

Al

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