The Aussie Economy: Tough Times are Coming
And there were echoes of that US economists’ survey in some of the new forecasts and commentary from the National Australia Bank about the coming year.
In its first report of 2009 the National Australia Bank downgraded Australia’s economic outlook, forecasting a shallow recession, a sharper rise in unemployment, official interest rates cut to 2.5% in the September quarter and a budget deficit hitting $40 billion next year.
The bank said it expects the economy will contract by a quarter of one per cent on average this year, and there won’t be any growth rebound in 2010 when the economy is expected to edge back into positive territory
The bank’s latest business confidence and conditions survey picked up a small upturn in both areas last month, thanks, it seems, to the government’s spending package.
But it’s not confident that upturn (which was from under the bottom of the barrel to merely the bottom of the barrel), will be long lasting, except perhaps in the housing sector.
The NAB said that despite avoiding the worst of global carnage in late 2008, Australian GDP forecasts have been cut significantly in light of global developments, notwithstanding aggressive policy responses.
The December reading on confidence/conditions was better than the nasty November outcome when the index fell to levels lower than those associated with the 2000 domestic slowdown.
Conditions in November were the weakest since the 1992 recession, but the NAB commented in yesterday’s release that “the level of -20 is little better than the bottom of the 1990 recession”.
“For 2009, we expect GDP to shrink by 0.25%- with a number of negative quarters during the year. As such the forecasts imply (moderate) recession in 2009. With no recovery till late 2009, the 2010 GDP forecasts have been lowered to 1% (0.25% for 2009/10).”
The NAB had previously forecast 2009 growth at 0.50% and 2010 growth at 1.75%.
” For non-farm GDP that equates to a small fall of -0.25% in 2009 and a rise of around 1% in 2010. In financial year terms we expect GDP growth of 0.8% in 2008/09 but only 0.25% in 2009/10.”
The bank said that when an economy shrinks over a 12 month period “that clearly represents a recession”.
“That said, the forecasts imply a relatively mild Australian recession – especially compared to falls in growth of around 2% in the major industrialised economies.”
The Japanese economy is expected to contract by 2% this calendar year, Singapore by up to 5%, the UK by nearly 3% and Germany over 2%.
The US will contract by 3% or more according to most surveys but we will get a better idea on Friday when the first estimate of 4th quarter GDP is released.
The world economy is going to grow by just around 0.5%, according to a report from the IMF later this week.
The NAB emphasised that it sees “no fast recovery in Australian activity” for a while.
“That is, the path of growth is more U than V shaped – with recovery not really getting underway till 2010.
“This shows up most in the financial year forecasts and especially that for 2009/2010 (growth of o.25%).”
The NAB said its forecasts include cash rates falling to 3% from 4.25 % at the moment (The RBA board meets next Tuesday).
“But the deterioration in the labour market will see further rate cuts (2 x 0.25% in the third quarter).
“We also expect further aggressive fiscal policy stimulus in 2009. The difference in the outlook for the private and public sectors is illustrated by noting that the forecasts include:
“Private demand falling by around 1.5% in 2009 and flat in 2010; and public demand increasing by around 6% in 2009 and 5% in 2010
“That implies worse fiscal outcomes (a deficit of around $40 billion in 2009/10) and a sharply deteriorating labour market (unemployment reaching 7%).
“With inflation likely to be negative in Q4 2008 (figures out tomorrow) and wage pressures stalling, we see core inflation back in the RBA target range by the second half of 2009.”
The Producer Price Index for the December quarter and 2008 were released yesterday, showing a rise of 1.3% in the final stage of production, down from 2% in the September quarter.
That was still well above most forecasts, with the market consensus for a rise of 0.3%.
The Australian Bureau of Statistics commented that the sharp fall in the value of the Australian dollar had a big impact with “imported commodities were impacted by exchange rate driven price increases” which offset a 29% fall in the cost of oil and oil products.
With its dramatic downgrades, the slight upturn in December confidence and conditions registered in the NAB’s survey looks interesting, but irrelevant.
“The December Survey provides evidence that the Government’s fiscal spending initiatives improved business conditions and confidence in the month – with the largest bounces in retail, wholesale and the discretionary spending parts of the service sector.
“That said, not all sectors saw improved conditions – with significant deteriorations continuing in mining, manufacturing, transport and to a lesser extent construction.
“Despite the significant bounce reported in the month, the overall level of confidence and business conditions are still very low and in trend terms still declining.
“Clearly the critical question is whether the December reading represents a turning point from overly pessimistic recent readings – especially for business confidence which is still around levels last seen at the bottom of the 1990/91 recession – or a temporary bounce that is unlikely to be sustained.
“Unfortunately there is much in the Survey to point to the latter outcome – or at least that is the way business is positioning themselves re employment and business investment.”
The NAB said its recently introduced measure of credit availability suggests an easing in those respondents reporting tougher credit availability (17% vis-à-vis 27% in November).
“With 39% of respondents reporting no need for credit – up from 30%), the results point to a lack of credit demand being the main problem, rather than credit supply.”
The bank also cut its global growth forecasts for 2009 – to only 0.25% (from 1.7%).
“These forecasts take on board dreadful economic numbers reported globally in late 2008 as financial disruptions spread to the real economy – notwithstanding aggressive rate cuts by central banks.
“In the USA, Japan Europe and the UK falls in GDP of around 1% appear to have been recorded in Q4 2008.
“Given the lags from wealth destruction, rising unemployment, falling commodity prices and falling business and consumer prices, all these economies, are unlikely to bottom before late 2009 – and record falls in GDP of around 2%.
“That coordinated slowing has spread to Latin America (commodity prices) and Asia (trade) – with Chinese growth lowered to 6.25% and non-Japan Asia to -1.25%. The resultant 2009 global GDP outcome of only 0.50% the worst since WW2.
“A moderate recovery is expected to start in late 2009 into 2010 – with annual growth in 2010 at, a still below trend, 2.5%,” the NAB said.
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