Saturday, February 07, 2009

Recession without the 'R' word

AUSTRALIA'S Reserve Bank has signaled further aggressive interest rate cuts, declaring that without them the economy will stall and almost fall into recession.

The Bank's new growth forecast, delivered in its regularly-scheduled statement just days after it cut rates to near all-timelows, has the economy effectively standing still for the rest of the financial year.

It takes account of both this week's cut in the Bank's cash rate to a mere 3.25 per cent and the government's $42 billion stimulus package now before the Senate.

The Bank says that even with those measures the Australian economy will grow by just 0.25 per cent over the course of this financial year, and by zero excluding strong gains in the rural sector which is recovering from drought.

The forecast is as close as the Bank can get to predicting a non-farm recession without describing it as a recession...

The economy grew by a paper-thin 0.1 per cent in the first quarter of the financial year, meaning that the Bank's forecast implies average growth in each of the following 3 quarters of a half as much, effectively zero.

The Bank says it believes the December quarter figure, due for release in March, will show "little, if any, growth."

The Bank's forecasts differ from the more optimistic account presented by the Treasury in this week's economic update in part because they have been prepared using the Bank's traditional "technical assumption" of no further changes in interest rates.

The Treasury by contrast abandoned that practice in this week's update and assumed a cut in the Bank's cash rate toward 2.5 per cent over the next two months, "broadly in line with market expectations".

The Bank's dire forecasts suggest that it also expects to have to make such a cut.

The futures market is pricing in a cut of 0.50 percentage points in the Bank's cash rate next month.

But the National Australian Bank warned yesterday its days of fully passing on such cuts were reaching an end.

Announcing that his bank would join its big competitors in passing on in full to mortgage holders this week's 1.00 percentage point cut, NAB chief executive Cameron Clyne said stubbonly high funding cuts made it "relatively unlikely" it would do so again. Bendigo Bank passed on 0.90 points of the cut.

The Reserve Bank's forecasts imply that its own rate cuts and the government's stimulus payments are among the only things preventing a recession. It said the December stimulus payment to pensioners, carers and low to middle income families boosted disposable incomes 4.5 per cent.

While some of that extra income had been saved, "a sizable proportion appeared to have been spent". Liaison with retailers suggested the spending continued into early January. The Bank expected the latests stimulus package at present under scrutiny in the Senate to "support consumption over the first half of 2009", after which it hoped growth in spending could gradually return to normal.

News Corporation chief Rupert Murdoch also lent support to the package saying he believed Australia had yet to feel the full force of the global downturn.

"The downturn in Australia is very late," he told an investor briefing. "It is beginning to hit now, but we are not yet feeling it the way we have felt it in Britain."

News Corporation lost of $9.8 billion in the December quarter after writing down nearly $13 billion in asset values. Its operating income was down 42
per cent.

The Reserve Bank said it expected unemployment to increase "materially" over the next year or so and that consistent with "the pattern in previous slowdowns and recessions" full-time employment was already falling.

The international Monetary Fund's forecasts released in January would, if realised, would make 2009 "the weakest year for growth in the global economy in the post-war era". The Bank said that information that had come to light since those forecasts suggested the outlook for Australia's trading partners was even worse.

Australia's terms of trade were set to fall 20 per cent, cutting real domestic income by 4 percent, some of which would be felt by the foreign owners of Australian corporations. The effect on resident Australians would be "somewhat smaller, although still substantial".