Economic growth figures released one day after the Reserve Bank slashed its cash rate toward the lowest point in a generation showed that the economy grew by less than 0.1 per cent between June and September, effectively standing still.
The official forecasts, updated by the Treasury and the Reserve Bank only last month assume robust growth from June averaging 0.3 to 0.4 per cent per quarter.
"This will mean a budget deficit," said Commonwealth Securities economist Savanth Sebastian. "Revenue growth will fall significantly in an environment where they are not going to cut expenditure but will be trying to stimulate things."
The headline figure would have been much worse but for a partial recovery in the farm sector after years of drought. When the contribution of the rural recovery is removed, the economy actually shrank by 0.3 per cent - the first time it has turned negative in eight years.
Treasurer Wayne Swan defended his forecasts asking a press conference not to "view the rest of this year through the prism of the September quarter"...
"That's a bit like deciding the outcome of a footy game at quarter time," he said.
"We have now got very substantially different policy settings through the economic security strategy and the easing of monetary policy. These are big stimuluses, put in place in a timely way because we recognised that this sort of result might be in the pipeline."
"I wish it was otherwise, but this is what the global financial crisis has delivered. Nobody can say with any great certainly how this will progress, except that since our last forecasts things have got a bit tougher."
The figures show that although household income climbed in the wake of the mid-year tax cuts, all of the extra cash was saved rather than spent. The household saving ratio more than doubled to 3.9 per cent, its highest level in 8 years.
Asked whether there was a risk that Australians would not spent the millions of stimulus cheques worth $1,000 or more to be posted next week the Treasurer said the cheques were directed at the Australians most likely to spend.
"When you deliver payments like this it puts people in a position to consume and we are delivering to people who are generally doing it a bit tough and will need to consume," he said.
Australians slashed non-essential spending the quarter, cutting spending on cars by almost 8 per cent and also winding back spending in hotels, cafes and restaurants.
Preventing the economy running backwards were big increases in government spending and public investment, up 0.6 per cent and 3.9 per cent, and in engineering construction, up almost 12 per cent.
Also shoring up the growth figure was a big increase in wholesale inventories - unsold goods sitting in warehouses. This is usually seen as a bad sign, heralding future cuts in production.
Although presented as economic growth of 0.1 per cent for the quarter and 1.9 per cent for the year, actual growth was slower - 0.06 per cent when expressed to two decimal places, an increase small enough to be revised away in future National Accounts.
Opposition leader Malcolm Turnbull accused the Prime Minister and Treasurer of helping stall the economy by talking up inflation in the quarter, "apparently unaware that the impact of the global financial crisis was already being felt."
The Treasurer again called on Westpac and the ANZ Bank to join the Commonwealth and National Australia banks in passing on all of Tuesday's rate cut. He said he would personally be speaking to chief executives, Gail Kelly and Mike Smith.
Colebatch: Ignore the cheer squads
"AT BEST, by the September quarter, Australia had braked to a virtual standstill. At worst, it was already going backwards - even before the markets' slide became a free fall.
The fact that Treasurer Wayne Swan yesterday could greet GDP growth of 0.06 per cent as some sort of triumph demonstrates how much panic has taken over the minds of policy makers.
This is a bad result for such an early stage of what is going to be a protracted slump. The real bottom line is GDP per head and, for the second quarter in a row, Australia went backwards. In the June and September quarters combined, Australia's output per head shrank by 0.5per cent - not a good omen for what lies ahead.
The slump has primarily been in consumer spending, which makes up more than 60per cent of the economy's demand. The Bureau of Statistics says consumers cut spending by 0.11 per cent in the June quarter, then relaxed it by 0.06 per cent in September. After five years of consumer demand averaging growth of 4 per cent a year, the brakes are now on.
Detailed figures suggest we're buying fewer cars and fewer clothes, eating and drinking out less often, driving less and cutting back at the supermarket.
Apart from health and financial services, no areas are immune from the slump.
Private investment grew by just 0.27 per cent in the September quarter, with only mining, construction and infrastructure projects still churning along. Farm output rose, but non-farm GDP actually went backwards.
Ignore the official cheer squads.
The figures suggest that high interest rates and lack of credit forced households and business into their own sharp U-turn in economic policy: from debt expansion to debt reduction, ASAP. There is much more of that ahead.
The December quarter will almost certainly be negative, and the question now is what will happen next year. These numbers suggest it'll be tough."
