Wednesday, November 19, 2008
Speaking to the Committee for the Economic Development of Australia in Melbourne last night Governor Glenn Stevens said that until recently he had been thinking that the Australian economy would slow much as it had in 2001.
In that year Australia recorded one single quarter of negative economic growth in September but avoided a second in December, escaping a recession as it is commonly defined - two successive quarters of negative growth.
As a result Australia along with Canada was alone among the major developed nations in avoiding the recession that swept through Europe and the United States.
But Governor Stevens said last night that recent international economic and financial events had made him believe that Australia would probably now experience "a more significant slowing than was otherwise going to occur"...
"It is fairly clear that a recession in the major country group, the G7, is under way," he told the audience.
However he believed that a bigger risk had been averted.
A potential collapse of an entire financial system with "massive repercussions throughout the world" was now unlikely.
"Markets are beginning to thaw. Actions taken to inject equity are stabilising a situation that could otherwise have unravelled quickly," Mr Stevens said.
While the guarantees that many countries were offering to depositors and banks were helping, the Governor warned that it was imperative that governments "specify as quickly as possible the parameters of their various guarantees so that market participants have a degree of certainty about how things will work."
Although the criticism was not directed at any country in particular, Australia is one of the countries that is yet to finalise the details of the wholesale funding guarantee that it will offer banks. The Opposition has argued that the means it plans to use - an administrative rather than a legislated guarantee, will be ineffective.
The Governor's comments came as Westpac entertained the possibility of a recession, saying that negative economic growth was possible in the September quarter and was likely in the March and June quarters.
"Growth will be around zero. Whether it's above or below zero is an open question, but two quarters of negative growth are certainly possible, said Westpac chief economist Bill Evans.
The Westpac-Melbourne Institute Leading Index slumped to an annualised growth rate of just 1.1 per cent in September from 3.5 per cent in August.
"This is a very disturbing fall," said Mr Evans.
The September fall was the biggest since the mid-1980s - greater than in the lead-up to the early 1990s recession.
"It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative," Mr Evans said.
The Reserve Bank Governor said the problem was that households fearful of an downturn were reigning in their spending in an attempt to conserve their wealth. If everyone attempted to do that simultaneously it would bring on a "paradox of thrift" making the downturn deeper and destroying more of their wealth.
Fiscal stimulus programs such as the $10.4 billion package announced by Australia would help, but even so, it was important for they passed the "good policy" test.
"Poor public policy proposals should not be accepted simply because they are presented as boosting short-term aggregate demand," the Governor told the Melbourne audience.