Australia has dented and burnished some pundits’ reputations in the last few days – first with the central bank’s unexpected decision on Tuesday to hold interest rates at 3.25 per cent (only a handful of economists/analysts called it correctly), and now, with its latest GDP report on Wednesday, a surprise fall in economic growth, as opposed to the slight increase predicted by just about everyone.
Rather than the 0.2 per cent quarterly growth expected, Australia’s economy contracted by 0.5 per cent in the December quarter compared to the previous quarter. The FT reports Wednesday that the country is now expected to enter recession after contracting for the first time in eight years:
“Economic data for December weakened across the board with the only positive contribution coming from net exports of goods and services. Since gross domestic product for the September quarter remained unchanged at a rise of 0.1 per cent, the Australian economy has narrowly averted a ”technical” recession.
However, many economists consider that the recession has already hit. Shane Oliver, chief economist with AMP, said today’s result hides the fact that non-farm growth has fallen for two consecutive quarters.”
Now, of course, a growing chorus of critics is blaming Australia’s central bank – first for continuing its rate-raising cycle after economic conditions globally had started to deteriorate. “Four interest rate rises in quick succession broke the back of the economy. We saw the economy slow down and it was already radically weakened,” said AMP’s Oliver told the FT.
Then there are those who, after cautiously endorsing the Reserve Bank of Australia’s decision to hold the main cash rate at 3.25 per cent on Tuesday, are now pointing fingers at the RBA for not cutting. Still others defend the RBA, suggesting Tuesday’s rate decision was correct as the impact of the rate cuts and the government’s A$42bn stimulus package have yet to flow through the economy. In a Wednesday post, Crikey has garnered a range of views in a post on the subject.
Regardless of what the pundits think, however, investors clearly do not like it – nor the grim GDP figures. As Bloomberg reports on Wednesday, the Australian dollar fell to a one-month low, government bond prices fell and stocks slid after the GDP report. The Aussie also weakened against the yen after a separate report showed demand for services shrank in February at a faster pace. The currency ended the Australian trading day down nearly 1.5 per cent at about 63.2 US cents.
Lex, in a note carrying the inspired headline of “G’day rate”, asks “for how long can the lucky country beat the odds?”
Daily detonations from the global financial sector are testing the resilience of the world’s largest shipper of iron ore, coal and wool. The steep falls in commodity prices have yet to feed through fully to Australia’s terms of trade, which declined by only 3 per cent in the December quarter.
Its housing market is yet to implode. Median house price to income ratios suggest Australian digs are the world’s dearest; according to a recent report by Demographia, the country does not have a single urban area in which homes are merely “moderately unaffordable”. Leading indicators of employment also point to a sharp turn for the worse. As [RBA governor] Glenn Stevens notes, a pause in the cutting is “appropriate for the moment”, and nothing more. Keeping ammunition in reserve makes sense. He will almost certainly need it.
Actually, says BusinessSpectator’s Alan Kohler, Australia is almost certainly already in a ‘technical recession’, but the phrase “has no meaning beyond politics.”
National morale will sink, and recession will be self-reinforcing because expenditure will fall further as consumers respond to the gloomy news. In reality, though, Australia’s fate is not in [PM] Kevin Rudd’s hands, or [RBA governor] Glenn Stevens’ or anyone else’s on these shores.
It’s almost entirely a matter of the United States finding a new foundation for a resumption of growth in the world’s headquarters of consumption. And that will not happen until its banking problems have been resolved. It is true that Europe, Japan, China, East Asia, Russia and so on now have dire problems of their own, with a collapse in global trade developing its own momentum, and banks everywhere short of capital.
But it began with the US financial system and will end there as well.
Related links:
Australian dollar drops to one-month low as economy shrinks – Bloomberg
Ask the economists, we’re not sure – Crikey
Australian interest rates - Lex
Let the shouting begin – BusinessSpectator
RBA boldly takes Australia into the twilight zone - FT Alphaville