Thursday, October 30, 2008

The 'R' word. It's baaaaack!!!

THE Australian economy is already going into reverse and could be officially in recession within months, according to alarming new assessments from leading forecasters.

In a dramatic shift of outlook, investment bank JP Morgan yesterday became the first major forecaster to say the economy will contract in this quarter and the next — satisfying one of the most common definitions of recession.

The firm sent its gloomy forecast to clients early yesterday. Within hours, another forecaster, Deutsche Bank, revealed it was also expecting the economy to contract in the current quarter despite the Government's $10.4 billion economic stimulus package, much of which will hit consumers' pockets in December.

JP Morgan Australia chief economist Stephen Walters told The Age he did not expect the fiscal stimulus package to have much impact...

“I will cushion the down side, but I don’t think the fiscal stimulus package will be that significant,” he said.

“I think it’s important for confidence that the government is seen to be doing the right thing, but the way consumers are feeling right now with recession levels of confidence, with equity markets having fallen 40%, with funds frozen all over the country, with concerns about the stability of the banks, with global recession having kicked in, with consumers now worried about their job prospects, why would you rush out and spent $1,000 that the government sends out in a nice little cheque to you?”

“As much as 40% of Australia’s spending is done by the top 20% of income earners. It’s their behaviour that matters the most, and they won’t be getting cheques.”

Mr Walters expects Australia’s GDP to slide by 0.3% during the current quarter and by 0.4% in the following quarter.

“As recessions go, that’s fairly mild. In the quarter after that we have growth of 0.6% and its positive thereafter, so this is not like the early 1990s recession which was stretched over 5 quarters with more than a year of negative GDP growth.

While not explicitly forecasting a recession, other forecasters spoken to by The Age foresaw similar developments.

“That forecast is not too far from consensus,” said Professor Philip Adams, an economic modeller who runs the Centre for Policy Studies at Monash University. “Whether growth is positive or negative, it’ll be pretty low.”

Westpac’s chief economist Bill Evans said he regarded negative economic growth during the current December quarter as “very, very unlikely”.

“You would have to assume that people aren’t going to spend much at all of the fiscal stimulus package, and we think 40% of it will be spent. We are expecting economy to grow in the December quarter, but after that we are expecting zero growth in the March quarter and then only very small growth as the effect of the stimulus dies away.”

Asked whether that could mean a technical recession in the first half of next year, Dr Evans replied that it might, but only by using a very technical definition.

“Growth will be low, no doubt about that,” said the National Australia Bank’s chief economist Alan Oster. “We don’t think it will be a recession, but it might feel like one.”

The government will release its forecasts in the Treasury’s Mid year Economic and Financial Review next month.

2 comments:

Anonymous said...

"I think it’s important for confidence that the government is seen to be doing the wrong thing"

Indeed. If they did the 'right' thing that would be disastrous for confidence.

Al

Peter said...

fixed

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