Monday, December 01, 2008

Expect near-zero growth this week - but don't call it recession

The Reserve Bank is considered certain to cut interest rates by at least a further 0.75 percentage points tomorrow ahead of official news expected to show that economic growth has shrunk to near zero.

Although better-than-expected investment figures have prompted some private sector forecasters to lift their estimate of September quarter growth, most are expecting just 0.2 per cent or less. One, TD Securities, is expecting zero economic growth in the quarter.

"We are expecting no growth in exports, and very little growth in private consumption," said TD strategist Joshua Williamson. "We can't discount the possibility that the result will be negative, possibly negative 0.1 percentage points which would shock a few people".

Treasurer Wayne Swan said he wouldn't speculate about negative growth, but stressed that the September quarter figures to be released Wednesday would be out of date...

"They will be an indicator of the impact of the global financial crisis and the extent to which it is slowing our economy, but they look back. There have been dramatic events internationally in the last month alone."

Two quarters of negative economic growth are commonly taken to define a recession. Most forecasters expect positive growth in the December quarter stoked by interest rate cuts and economic stimulus cheques which will begin hitting bank accounts on December 8.

However many expect negative growth in the first two quarters of next year, after the December stimulus cheques have been spent.

The Treasurer yesterday flagged further stimulus measures "prior to Christmas".

Mr Swan said they would deal with "critical infrastructure" and be "very job-creation-intensive".

Asked whether bringing forward the tax cuts due in June was also an option he told the nine network that the government needed a range of options and that he wouldn't speculate.

"You are allowed to speculate, but what we will do is we will carefully examine all the options that may be required," he replied.

Tuesday's expected rate cut of 0.75 percentage points would slice another $150 off the monthly cost of servicing a $300,000 mortgage if fully passed on.

It would bring total saving since rates peaked in August to $530 per month.

The futures market is pricing in further cuts that would bring the Reserve Bank's cash rate down from its present 5.25 per cent to 3 per cent by March. They would cut the standard variable mortgage rate from 7.7 per cent to around 5.5 per cent if fully passed on. Mortgage rates were last at the level in the late 1960s.

The outcome of Tuesday's Reserve Bank board meeting is more than usually uncertain. The last two board meetings have rejected the cuts proposed by the Bank's staff and decided instead on bigger cuts. Tuesday's board meeting is the last scheduled until February. While the Bank stands ready to call an unscheduled January meeting if needed, the board members might decide on a bigger-than-recommended cut tomorrow in order to act quickly.