Economic data to be released today will indicate whether Australia is technically in or approaching recession.
However, the RBA’s decision to leave interest rates on hold suggests that things may not be as bad as we’ve been led to believe.
ANZ’s Mr Hogan predicts today’s GDP to be essentially flat. Not great when you look at Australia’s average of 0.75-0.8 growth per quarter, but not too bad compared to many other economies.
“Negative GDP suggests the economy is shrinking,” says Mr Hogan. “It would be seen as the first leg of a technical recession, which is defined as two consecutive quarters of negative growth.”
CommSec’s Mr Sebastian expects 0.4 per cent growth.
“Now keep in mind virtually all advanced economies around the globe have had negative growth or are in recession. What that says about Australia is we stand far apart from our global peers,” he said.
The data is likely to show rural sector is doing well, because a low dollar means their products sell cheaply overseas.
“So you’ve got this massive global economy shrinking, but Australia managed to hold their slice of the pie because of a weaker Australian dollar,”says Mr Sebastian.
In terms on unemployment, a positive figure today would mean that job cuts may not be as bad as Australian workers are bracing for.
“Unemployment will rise, but it will be a steady crawl instead of massive job shedding,” says Mr Sebastian.
“If you just get a steady crawl in unemployment we will see a period of steady economic slowdown, but not the steady contraction we’ve seen overseas.”
Turning to interest rates, Australia has had some of the highest interest rates in the world, which gives the RBA more leeway to stimulate the economy down the track. But positive data on housing and retail sales mean the RBA is taking a wait and see approach.
“A strong GDP result means the RBA will not have to cut significantly. We’re actually forecasting a 2.5 per cent cash rate low,” says Mr Sebastian.
“Certainly further cuts are on their way, we’re not out of the woods yet but we’re not going to see the substantial rate cuts we’ve seen of 1 per cent.”
Despite the pessimism constantly touted in mainstream media, Mr Sebastian believes recession ‘could be avoided.’
“Retail sales in December alone were the best results we had since the Sydney Olympics,” says Mr Sebastian.
“So consumers were out there on a spending spree, and they weren’t buying consumables. It was big ticket items like the plasma screen, or furniture.”
All that spending is one reason the Reserve Bank kept interest rates steady yesterday, he says.
“They looked at the result and said ‘you know, things aren’t as bad as we’ve made them out to be.”
If Australia can avoid slipping backwards on economic growth, we may be able to avoid a recession, says Mr Sebastian.
“It’s likely with further stimulus and further interest rate cuts, Australia may get out of this particularly global meltdown with a slowdown rather than a recession.”
So it appears that things may not be as bad as we have been led to believe. I guess we’ll find out later today when the figures are released.
If they are not as dire as predicted then this will equate to an overwhelming endorsement of the Government’s handling of the crisis.
Perhaps, “The World’s Greatest Treasurer” will need to hand over the tiara.
Regardless of the outcome, the spin from both sides, as usual, should be entertaining…
UPDATE: THE FIGURES ARE OUT….
The Australian economy contracted in the final three months of last year, surprising analysts and suggesting the nation will enter a recession this year, triggering more job losses. The Australian dollar sank on the news.
Gross domestic product growth for the fourth quarter dipped 0.5%, the Australian Bureau of Statistics said, following a 0.1% rise in the third quarter. Analysts surveyed by Bloomberg expected the economy to grow by 0.2% in the fourth quarter.
In a report just in from SMH...
”This is inevitably the first quarter of Australia’s recession, that it’s currently in,” said Matt Robinson of Moody’s Economy.com.
”It makes a mockery of the comment from RBA yesterday that Australia hasn’t seen the sizeable contraction in demand that other economies have seen.”
Excluding the farm sector, the economy shrank by 0.8% alone. The main drags on the economy were a slump in manufacturing, which lopped 0.5 percentage points off the quarterly growth rate, while property and services subtracted 0.3 percentage points.
For the year, the economy expanded 0.3%, less than expectations of a 1.2% increase according to a Bloomberg survey.
The poor national accounts figures come one day after the Reserve Bank justified a decision to leave interest rates unchanged in part because the economy had not “experienced the sort of large contraction seen elsewhere.”
Macquarie senior economist Brian Redican said there were surprises in today’s release with consumption and investment weaker than partial indicators suggested, and suggesting the RBA will have to take out its rate axe again.
”It’s a bit of a dog’s breakfast,” he said
”The RBA must be very confident that spending is holding up better than all the surveys suggest, but that’s a big risk. A cut of 50 basis points next month has to be a good bet now.”
The RBA decided to hold rates steady at a 1964 low, citing the strength of the Australian financial system and the flow-through effects of the 4 percentage points in cuts already made since September.
The Australian dollar fell on the announcement, dropping almost one US cent to 62.93 US cents in recent trade, down from 63.86 US cents. Stocks were also weakened, with the main indexes retreating to be about 2.2% lower for the day.
The December quarter was the weakest since the final three months of 2000, when the introduction of the GST distorted the economy and produced a 0.9% contraction.
Australia’s unemployment rate is now running at about 4.8%, a tally that’s set to rise in coming months as companies shed workers to remain in business.
In the past week, firms have announced thousands of job cuts, including at Pacific Brands, Robert Bosch, and Lend Lease.
”For all intents and purposes, today’s data confirms the Australian economy is indeed in recession,” said Macquarie interest rate strategist Rory Robertson. ”The good news is that the recession here is substantially smaller than the US, UK and elsewhere. But the next year or two are going to be a difficult time for the Australian economy.”
Australia is yet to enter a ”technical recession” – considered to be two straight quarters of shrinkage – because the third quarter of last year remained in positive territory. The meagre 0.1% growth for the period was left unrevised by the ABS. The bureau did chip away at the September quarter’s annualised growth figure, lowering it to 1.8% from 1.9%.