Monday, January 19, 2009

Recession: Access Economics breaks the dam

The Treasurer Wayne Swan has promised "further action" in the wake of a damning assessment of Australia's outlook by Access Economics which is now predicting recession.

Previously optimistic, and known as Australia's "Treasury in exile" for the large number of ex-Treasury officers it employs, Access has sent its new assessment to high-profile subscribers including most of Australia's top 1,000 companies.

Access says Australia's economy shrank in December quarter despite the government's $10.4 economic stimulus package and will shrink again in this one.

"Conditions are worsening very rapidly," says the report. "This is not just a recession - it will be the sharpest deceleration Australia's economy has ever seen."

Anticipating criticism for breaking ranks with forecasters at the banks who are reluctant to countenance a recession, Access says it recognises that in publicising its forecasts it will make them "ever so slightly more likely to happen"...

...but it says it "wouldn't be doing its job" if it didn't outline what it believes is happening.

Access says corporate profits outside the banking sector will halve over the next two years, pushing some firms to the wall. "It is not just that funding from internal cash flows is about to become harder, it is also that many corporates are already finding it very hard to borrow from banks or even by issuing corporate bonds, Access director Chris Richardson said.

"Foreign-owned firms can no longer rely on the generosity of headquarters to tide them over."

Access expects Australia's unemployment rate to hit 7.5 per cent early next year - less than in previous recessions - with the unemployment queue swelling from its present 500,000 to 850,000."This is the most likely outcome, but much will depend on our new industrial relations system," Mr Richardson said. "Let's hope that it works better than the old one did during the previous recession."

The report points to "a clear risk" that its forecasts "are not dire enough."

"Our boom of the last four years has been all but undone in the last four months. That may mean not merely the recession we forecast, but something bigger and badder," it says.

"Unemployment could go higher than the 7.5 per cent we forecast. And although we already project a halving of corporate profits, it could get even uglier."

While making no comment about the specific forecast of a recession Mr Swan said he agreed with the report that the year ahead would be tough and there would be no quick fix.

"There's no point guiding the lily in any way," he said.

"China and other emerging economies now caught up in this crisis are expected to slow much more sharply than previously anticipated."

"We will not hesitate to take further action if necessary to support growth and limit the impact on Australian jobs."

Access says it had thought that China's relative strength would buy Australia "12 months of immunity from worldwide troubles", but China's boom was now collapsing quickly. Its economy should now grow by only 6.2 per cent this year -down from the 9.75 per cent predicted by the Australian Treasury in November.

Spot steel prices, once $1,200 a tonne, have collapsed to us $325, "posing significant risks to Australian producers as contract prices are renegotiated in the lead up April."

The Access report describes the the Federal budget as "buggered," noting that the latest revenue forecasts were made before the latest collapse in commodity prices.

"As Access stressed during the good years, the big personal income tax cuts and family benefit increases of recent times were spending a temporary surge in revenues. With that money now disappearing, Canberra faces ugly policy choices."

"The glory days of big budget surpluses are over and the Treasury is now staring down the barrel of deficits as far as the eye can see."

"This nation has legitimate policy goals in education, infrastructure, Federal/State relations, climate change and water management. What it doesn’t have any more is the money to help achieve reforms in those areas," the report says.

Access believes that Australian share prices have probably stabilised, after halving in order to reflect the prospective halving in company profits. It says the next risk to household wealth will be a slide in house prices this year of 5 to 8 per cent.

"Housing prices reached peaks relative to income only seen in the likes of Ireland and New Zealand," the report says. "From here on, top-end prices will be pressured by the collapse in share market wealth; bottom-end prices will he be hammered by a sharply rising risk of unemployment; and prices in general will be hurt by the higher returns relative to price now available on the share market."

Access expects the Reserve Bank to cut its cash rate to an all-time low of 2.5 per cent this year "in order to take out insurance," allowing the standard variable mortgage rate to fall to an all-time low of 5.25 per cent.

It says fragile commodity prices and a ballooning current account deficit should push the Australian dollar to a long-term low of US 56 cents.

NSW will be the worst-affected state by the recession and is was "already drowning with its economy contracting at US-style rates".

Victoria is on the brink of recession but is "taking the pain early with manufacturing and financial services the centre of its slowdown". It should do relatively better than the resource-rich states of Western Australia and Queensland during 2010-11 as they continue to suffer from low commodity prices.


Don't mention the 'R' word? Until now, Australia's best-known forecasters haven't. That could be because they work for banks, or it could be because they're natural optimists.

But they have forecast Australia edging suspiciously close to recession. Some have even forecast zero economic growth. Not negative, but as close to negative as possible.

It's been left to the Australian arms of foreign financial institutions to describe the Emperor's state of undress as they see it.

Until Access. Previously as optimistic as the Treasury about Australia's prospects, they've switched to pessimism as rapidly as things have deteriorated in the last few weeks. There's every reason to believe that the Treasury has as well.

Both Access and Treasury believed that China would continue to boom regardless of what happened in the nations it sold to, buying Australian resources irrespective.

It is now clear that isn't happening. Access notes that 10,000 Chinese factories have closed in recent weeks and untold numbers of Chinese employees have been asked not to come into work.

Neither China's rising middle class nor its fading ability to deliver central government edicts will insulate it from what's happening to its customers.

It's the same with us. It isn't this government's fault, and it is not the fault of the last one. But that government could have better prepared us for what we are now facing by at least talking as if it would one day happen. It didn't.