Up or down? Next three months are crucial
ON THE usual definition, this has been the longest period of continuous growth the Australian economy has ever seen. But the next three months should tell us whether it is about to end.
ON THE usual definition, this has been the longest period of continuous growth the Australian economy has ever seen. But the next three months should tell us whether it is about to end.People are understandably reluctant to talk of recession. After 17 years of growth, it's hard to believe it's going to end now. And there are at least four good reasons to think it won't.But there is a new sense of fear in the air. You could feel it this week in the spare, austere tone of the International Monetary Fund's latest update. Once the IMF used such reports to warn policymakers of the dangers ahead, and urge reform. Not now: the dangers ahead are obvious to everyone, and it's too late for reforms. In recent weeks the data from the economy and the financial markets has become scarier. Consumer confidence has fallen in a heap. Business confidence has crashed alongside it. Firms and households have stopped borrowing, banks have stopped lending, consumers have stopped spending - or so it seems.The economy was meant to slow, but not at this pace. At the end of last year, business borrowing was growing at an annualised rate of 25%. Six months later it grew at a pace of just 4%. That is serious braking - and, as Westpac senior economist Andrew Hanlan notes, it probably puts paid to the boom in business investment that the Treasury thought would keep the economy humming in 2008-09. Tim Toohey, chief economist at Goldman Sachs JBWere, used to be the only market watcher warning of a possible recession. These days he has plenty of company. "We've always thought there was something like a 40% chance of a recession," he says. "Now, at best, we're looking at slow-speed growth, with the non-farm urban economy close to recession."Michael Blythe, chief economist of the Commonwealth Bank, disagrees. "The negatives may be greater than at any time in the past five to six years - but so are the positives," he says, pointing to the commodities boom that had helped protect the Australian economy from various shocks over the past five years. The big stimulus is coming from export prices, and it is huge. The Bureau of Statistics estimates that, between March and June, the amount Australia was paid for its coal exports increased by 95%, and our payout for iron ore exports increased by 54%. Given the amount of the stuff we sell, that is an enormous increase in earnings. Some will go to overseas owners, some will buy foreign machinery, but most of it will flow back into the economy to be spent over the coming year.Then there's more than $10 billion a year of tax cuts that started flowing into our pockets last month. There's the rain soaking into the fields, boosting hopes of a profitable year on the land at last. And there's the fact that if the economy starts to stall, both the Reserve Bank and the federal budget are in a good position to get it going again.In the short term, none of the market professionals expects the Reserve to panic and cut rates by September, as one newspaper forecast excitedly yesterday. The Reserve set out quite deliberately to slow the economy, put downward pressure on inflation and (most importantly) prevent expectations of higher inflation becoming entrenched. As the underlying inflation rate of 4.3% in the year to June suggests, that battle is far from over. The Reserve won't move until it is confident it has won.That makes the next three months crucial. Think of it like this: we are in a car that has been braking sharply as a result of higher interest rates, higher petrol prices, diminishing household wealth and fear of what might lie ahead. Now the car has slowed sharply, the question is whether we, the decision-makers of the economy, keep our foot on the brake, and slow down even further, or release it to keep cruising at our present speed.The Reserve's goal was the latter: if Australia's growth in output slows to about 2.5% - 2% excluding farms and mining - it believes inflation will gradually crawl back within its target zone of 2% to 3%. A Reuters survey of 21 financial institutions found that roughly half, including Toohey, now think the Reserve will start cutting rates before Christmas, most likely in November after it gets the September quarter inflation figures. If the figures show the pace of underlying price rises falling - as it arguably was in the June quarter - then the Reserve will feel able to declare victory and ease the pressure on the economy.The big question then would be how much they would ease. ? Prime Minister Kevin Rudd yesterday demanded that banks pass on to mortgage-holders any cuts in official interest rates by the Reserve Bank.Mr Rudd admitted the economy was slowing, but refused to say whether it was happening too rapidly. "It's obviously happening out there," he told Fairfax Radio Network when asked whether the economy was slowing. With AAPNATIONAL SNAPSHOT HOUSING In housing, everything is shrinking except the need for homes. Treasury estimates that Australia needs to build more than 200,000 new homes a year to meet the underlying demand.But in the year to March just 147,000 were completed, and at each stage - approvals, finance, commencement and completion - the numbers are tumbling.The market for existing homes has also shrunk, with finance approvals down 30% since June 2007. Housing prices fell marginally in the June quarter, and Australian Property Monitors chief Michael McNamara predicts Australia will follow the US and Britain over the cliff, with prices to fall 10% this financial year.CREDIT Debt has been one of the big drivers of Australia's growth over the past 25 years, but it's now taking a break. With Australians now owing $1.8 trillion, credit growth in the June quarter slumped to 1.3%, less than half its average rate and the lowest growth for 15 years. With interest rates high and demand slumping, business has reefed the sails and battened down the hatches, while debtladen households are in too much pain to want more.SHARE PRICES Just nine months ago, fired up by the resources boom, the benchmark ASX/S&P 200 index hit a new record of 6828.7.By lunchtime yesterday it had sunk to 4910.3. By and large, for every $100 your shares were worth then, they're worth just $72 now, putting them back to where they were at the start of 2006.SUPERANNUATION The plunge in the stockmarket has flowed through into Australians' superannuation accounts, which provide 30% of the funds invested on the market.In the past financial year, on average, retail funds lost 9.8% on their investment portfolios, and industry funds lost 5.8%. Analysts tip further losses in 2008-09.SALES Soaring petrol prices and interest rates have clobbered the retail industry, with the volume of retail turnover falling slightly in both the March and June quarters.The combined fall was only 0.9%, after a buoyant 2007, but it's the biggest downturn in retailing since the 1990-91 recession.Last month's tax cuts are tipped to provide some relief ahead.JOBS Employment is usually the last indicator to turn, but so far it has been surprisingly resilient - except in Victoria. In the first half of 2008, Australia added 105,000 jobs, down from 146,000 in the previous halfyear.But only 7000 of them were in Victoria, epicentre of a wave of car industry retrenchments.Unemployment is still 4.3%, but forecasters predict it to rise to about 5% over the next year. Still, so far, employment remains one of the economy's strengths.IS AUSTRALIA HEADED FOR A RECESSION?YESALAN OSTER, NAB chief economistTHERE is very slow growth outside the farm and mining sector, so if you were going to say, 'What's the chance of a serious recession?' I would probably put it at 25%-30%. We've lowered our growth numbers for next calendar year to 2.25%. But if I take out the mining and farm sector that equates to 1% and 1% is not good. So unemployment goes on its way to 5.5% and on its way in 2010 to 6% or probably higher.We are going to have the slowest growth rate since 2000 and for a lot of people it is going to feel a lot worse than the numbers that have come out. There will be huge disparity between sectors, and there are some sectors being clobbered. NORICHARD ROBINSON,BIS Shrapnel senior economistWE'VE got a few key fundamentals that will help us avoid a recession. The most obvious is commodity prices, which has given a huge boost to the terms of trade, which in turn gives us a big boost to our national income. In other words, I don't think China is going to collapse. There is a chronic undersupply of housing and a lot of pent-up demand and if our economy starts flowing, and if the Reserve Bank reduces interest rates, investment will pick up remarkably. Everybody has gone overboard on the doom and gloom. Last year we had astronomical growth, so I like to view this year's slowdown as the slowdown we had to have.MAYBECHRIS MALIN,Link Recruitment chief executiveCONSISTENTLY low unemployment rates are helping shield the labour market from potentially a downturn in the economy. While the effect of global economic pressures, such as the downturn in the UK and US financial markets and rising oil prices, is putting pressure on Australian business, the labour market is still strong and we are still seeing plenty of employment demand within its specialist sectors.Businesses are nervous about employing permanent employees because of an unstable market and are looking at recruiting temporary staff . Retention should be a key focus of employers. They cannot afford to lose talented staff.
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