Saturday, May 09, 2009

Out of recession within months!

Good news, eh?

AUSTRALIA will be out of recession within months according to new forecasts from the Reserve Bank, but it warns the path back to economic health will be slow and uncertain.

Released ahead of next week's Budget, the Reserve Bank's forecasts suggest that the worst of the recession is upon us right now, although it expects unemployment to climb for some time.

The Bank predicts that the negative economic growth recorded in the December quarter will be repeated in the March quarter and then in the June quarter with the economy shrinking by a total of 1.25 per cent before beginning to pick up from the middle of the year.

That would make this decade's recession both shorter and less severe than those of the early 1980s and early 1990s...

But the pickup will be more gradual than after either of the earlier recessions with the economy growing by a mere 0.5 per cent throughout 2009-10. The Bank isn't expecting a return to trend growth until 2010-11.

This is a year sooner than the Treasury which is preparing next week's Budget on assumption that Australia will not return to normal growth until 2011-12.

The Bank's Quarterly Statement says conditions were "deteriorating rapidly" up until February. Since then it has seen "signs of a turning point."

Both China and Korea have recorded stronger economic performance in recent months and both appear to have been stockpiling resources, leading to substantial price rise3s for Australian metals including copper, lead and zinc.

The Bank also points to encouraging signs in the United States and an improvement in global share prices which have climbed 30 per cent from their low in mid-March.

Its forecasts for Australia assume some impact from the early stages of building the national broadband network and from the "modest additional stimulus" it expects in the Budget.

It says real household income after interest payments jumped more than 9 per cent in the year to December, boosted by its own interest rate cuts and around $8 billion in stimulus payments. It expects the next $12 billion of stimulus payments to further bolster income and spending but it notes that working in opposite direction is an 8.5 per cent cut in household wealth and the fear of rising unemployment.

Although the Bank does not put a figure on its unemployment forecast it says its liaison discussions with businesses point to hiring freezes, labour shedding and cuts in working hours.

It says there has been a "significant increase in the number of full-time workers temporarily working shorter hours" and that in past downturns this led unemployment.

Businesses are still winding back investment and when rolling over loans are being charged higher margins. The big five banks have virtually taken over the mortgage banks accounting for 4 out of every 5 new loans, well up from 3 out of every 5 before the economic crisis. Hardly anyone is taking out fixed-rate mortgages with all but 2.5 per cent of new mortgages at variable rates, the highest proportion since the last recession when Australians punted that mortgage rates would continue to fall.

The Bank notes that financial markets expect it to cut its cash rate at least one more time over the next few months but has not factored a further cut into its forecasts.

It says its forecast of an economy recovery-year is subject to more than the usual number of risks and uncertainties. On the downside there might be further bad news about the US or European financial systems and China's emerging recovery may not take hold.

But on the upside the firms that have shelved their investment plans might bring them forward more quickly than expected as the recovery gathers steam.