Investors in retreat amid Greece and growth doubts

THE Australian sharemarket slumped to a two-month low yesterday, struggling after Wall Street fell sharply and amid concerns about Greece's record bond write-off looming and disappointing local economic growth figures.

THE Australian sharemarket slumped to a two-month low yesterday, struggling after Wall Street fell sharply and amid concerns about Greece's record bond write-off looming and disappointing local economic growth figures.

Losses accelerated towards the close, tracking growing nervousness among Asian investors ahead of a deadline for Greece to obtain support from its private creditors for a debt- reduction deal or face default.

Australia's benchmark S&P/ASX 200 shed 61 points, or 1.45 per cent to 4143.7 points. This marked the third loss in a row, with the broader market down 3 per cent this week.

The local fall came a day after US stocks had their first big stumble of this year, with Wall Street's Dow Jones industrial average dropping more than 203 points.

The biggest concern among global investors is a deadline later tonight for Greece's private bondholders to accept a deal to swap their Greek government bonds for new debt that will have a lower face value and interest rate and a 30-year maturity.

The swap is vital for Greece to cut its debt and gain a bailout of ?130 billion ($161.7 billion) from other countries and the International Monetary Fund. Without the bailout, Greece could default on its debt later this month and rattle markets around the world.

"What the market has factored in about the recovery in Europe has involved a lot of assumptions. And a lot of those assumptions have proved to be somewhat brave at this stage ... Europe is not resolved," Matt Sherwood, head of investment market research at Perpetual Investments, said.

In a further blow to local investors, crucial gross domestic product figures released yesterday showed Australia's economy slowed more than expected in the December quarter.

The figures increased the likelihood that the Reserve Bank will cut interest rates again to bolster demand as Australia's annual economic growth hits the slowest pace since the global financial crisis.

The economy expanded 0.4 per cent in the quarter, compared with the revised 0.8 per cent pace reported for the September quarter, according to the Australian Bureau of Statistics. Economists had tipped economic growth of 0.8 per cent for the December quarter.

"It was obviously a disappointing starting point for 2012 but, if you take a step back from the headlines, there is enough happening below the surface to say we are heading for growth in 2012," Commonwealth Bank chief economist Michael Blythe said.

"It's the mining boom that's underpinning that outcome," he said.

For the year, the economy grew 2.3 per cent, a shade less than the 2.4 per cent predicted by economists. The rate was also slower than the revised 2.6 per cent pace recorded at the end of September.

The dollar dropped more than half a US cent on the news as investors viewed the weak GDP figures as implying a greater chance of more interest rate cuts to come. "At this point, GDP is a flag that (interest) rates may need to fall further, but we need follow-through in the unemployment rate to be an actionable item," Matthew Johnson, a senior economist at UBS, said.

Despite the reported reported slowdown, Australia remains among the fastest-growing economies in the developed world thanks to rising demand for commodities in Asia. Its 2.3 per cent growth compares with 1.6 per cent in the US, 0.7 per cent in the euro zone and Britain, and a 1 per cent contraction for Japan.

Still, the 2.3 per cent expansion last year was the weakest since 2008. It's also well below the average pace of 3.3 per cent over the period since 1997.

The Reserve Bank of Australia's deputy governor, Philip Lowe, said further rate cuts would hinge on the strength of the labour market, a view echoed by economists.

Macquarie economist Brian Redican said weakening employment was on the horizon and likely would prompt the Reserve to cut again. "The RBA will cut when unemployment rises above 5.25 per cent," he said. "We think unemployment will rise in next couple of months and so expect a rate cut in May."

The jobless rate is at 5.1 per cent, with a consensus of analysts expecting it to hit 5.2 per cent when the numbers are updated today by the ABS.

Dr Lowe pointed out the Australian economy had been undergoing structural change for many years - not just since the recent appreciation in the Australian dollar.

In local shares, all sectors ended in the red, but mining stocks once again led the local losses as investors re-evaluated demand for Australian resources after China lowered its growth target yesterday.

Inside

Punters in a rush for

the exits.

Ian Verrender, Page 7

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