|
The economics teams at Goldman Sachs JBWere and Merrill Lynch have slashed their estimates of 2008 and 2009 economic growth for Australia and are now predicting recession, despite forecasts to the contrary from Federal Treasury and the Reserve Bank. Goldman Sachs JBWere were the first to predict that the Australian economy would be in recession in the last two quarters of 2008 in a report in mid October. Now they have updated that report and gone further, telling clients the slump this quarter is deeper and will continue until at least June 2009. Merrill Lynch expresses more optimism though about 2010.
The two see the Federal budget going into deficit, unemployment will rise to 7.5% and the Reserve bank will cut interest rates to a low of 3.5%, a point suggested late last week as well by Macquarie Bank interest rate strategist, Rory Robertson. Goldman Sachs urged Federal treasurer Wayne Swan and the Government to worry less about “protecting the budget surplus” and do more to stimulate aggregate demand in the economy.
Robertson and the two teams now say we will get a 1% cut in interest rates from the Reserve Bank at its meeting next Tuesday, which will take the cuts since September to 3%, a measure of how seriously the RBA views what is happening in the economy. Federal Treasurer Wayne Swan still claims the budget won’t go into deficit: the forecasts reckon it will, and they were supposed by the latest update from the well-connected Access Economics team in Canberra.
Goldman Sachs JBWere’s downgrade follows one in the US from their economics group there for the US on Friday: Goldman Sachs said US GDP was shrinking at a 5 % annual rate in the current quarter and will drop 3% and 1% in the next two quarters. It said in a note sent out to clients over the weekend that US unemployment will reach 9% by this time next year. In contrast the US Fed reckons unemployment will get to 7.6% next year (it’s 6.5% at the moment).
According to Goldman Sachs JBWere:
We have revised down our economic growth forecasts from 2.0% in 2008 and 1.7% in 2009, to 1.8% in 2008 and 1.0% in 2009. The new forecasts incorporate a deeper recession through 2H08 than we first forecast in early October and a shallower recovery path through 2H09.
We have also revised our interest rate forecasts, with the RBA now expected to cut the cash rate to 3.5% by March 2009 (75bp lower than our previous forecast).
The combination of dramatic financial wealth destruction, debilitating tightness in money markets, rapidly slowing credit growth, sharp falls in commodity prices and evidence that Australian house prices are declining led us to formally adopt a recession in Australia as our base line view on 12th October.
Since that time our conviction that Australia is poised for its first recession in 17 years has strengthened.
The reduction in commodity prices by our resource strategy team suggests that Australia’s terms of trade will decline — 20% year on year by end- 2009, sufficient to strip around 3.0% from domestic demand growth.
Meanwhile, Merrill Lynch told its clients today that the economy was worse than it had previously thought:
The Australian economy is being overwhelmed by the global financial crisis and external growth shock, impaired credit markets, collapsing asset prices, and imbalances on the household sector balance sheet. We are downgrading our 2009 GDP forecast to 0.2% (down from 1.7% previously).
We expect the economy to contract on a through the year basis over FY09.
In our view, the very substantial monetary and fiscal policy response and adjustment in the exchange rate will not be sufficient to avoid a recession over 1H2009. Our business cycle analysis and leading indicator frameworks are pointing to a rapid deceleration in domestic demand growth over the next 3-4 quarters. Lead indicators of employment (and income growth) have deteriorated significantly over the past quarter.
Our downgrade to GDP growth covers all components of private demand (household spending, housing and business investment) and export volumes.
Business investment in particular will be negatively impacted by the global recession, the fall in the terms of trade and the tightening in the supply of credit.
Global lead indictors have fallen deep into hard landing territory. ML is forecasting global growth of just 1.5% in 2009, down from 3.4% in 2008.
The commodity price and terms of trade decline in 2009 will sharply reduce gross domestic incomes (both directly and indirectly). The steep decline in asset prices over the past 12 months and need for households to lift savings and de-lever reinforces a very weak outlook for household spending through 2009, despite the cash-flow relief coming from lower interest rates and petrol prices.
We expect the labour market to weaken significantly over the next 12-18 months with employment growth falling to -2.0% by late 2009 and the unemployment rate rising to 7.5%.
The household savings rate is assumed to rise to 3.75% (from 0.9% currently) as de-leveraging intensifies.
We are more optimistic about 2010, with substantial global and domestic policy stimulus expected to support a recovery in growth. We expect GDP growth of 2.2% in 2010, led initially by a cyclical recovery in housing activity and strengthening global growth. W expect the RBA to lower the cash rate to 3.5% by Q1 2009 in response to the global downturn, the deep slump in domestic demand growth and reduced inflation pressures. The main focus of policy over the next 6-9 months will be addressing falling corporate and household income growth, which run the risk of exacerbating the de-leveraging underway in the economy.
| 
12 Comments
didn’t bother reading it - thought predictions were being made by someone with credibilty
Unemployment at 7.5% will mean a lot of tough times for a lot of Australians, but it’s still a stunningly better figure than has been seen in economic downturns over the last thirty years. Thanks Paul Keating.
For god’s sake, why should we listen breathlessly to these ridiculous “economists” from Merrill Lynch and Goldman Sachs when they couldn’t even balance their own bloody books.
All you little journo types need to stop doing this. They were, in the words of Ken Henry, W R O N G, for the past 5 years weren’t they.
Go and find someone like Paul Krugman to quote instead of these turkeys.
And do not forget that if there is a world recession these merchant bankers caused it.
The comments last week from the RBA Governor about talking ourselves into a recession are some of the most helpful comments I’ve heard in a long time. Selling papers is about bad news, not about news.
Recent articles about FMG triggering its price to be forced down only to be followed by a significant increase after it released good news is a good example.
Everyone who spent a great deal of time telling us to fully invest and it would be different this time are now rushing to be the first to predict the worst. If things turn out better than those worst case scenario forecasts, then it doesn’t matter, right?
Wrong. If those worst case scenarios are reported and reported then consumers and businesses cut back spending. This then triggers the scenario being forecast. A self fulfilling proficy.
Let’s get some good news into the airwaves and internet to balance the doom and gloom. There are some meaningful bits of good news out there but they are just not being reported.
Marilyn, how right you are!
The whole lemming-like chorus of “we’ll be first with the worst” drives me nuts.
Will everybody (media in particular) shut the f*** up about recession and kindly just get on with life! Then your investments would still be looking better, your property would be worth more, people and companies would still be buying cars and we’d all be in less need of an Asprin and a lie down.
So we don’t grow for a year! It’s simply not the end of the world and doesn’t warrant giving so much oxygen to this s***!
Can you tell I’m over it?
Goldman Sachs JBWere and Merrill Lynch are optimists - see
http://cpds.apana.org.au/Teams/Articles/Fortress.htm#Managing
Let’s not confuse their corporate budgets with our government’s budget..
Meanwhile over at head office, Modern Rome, Naomi Klein reckons it’s looting of the treasury this last 2 months of the W Bush regime. Not very funny.
Funny too for some reason when I posted on this last Wednesday 19 Nov 2008 entitled “W Bush regime ‘looting the treasury for illegal bailout’: Naomi Klein, Democracy Now” referring Amy Goodman show big in the alternative media over there, on YouTube etc, the traffic counter for my blog via USA web server crashed. The blog is on zero traffic counts for 5 days running. WTF?
Maybe there are a bit worried over there about talking down the recession, like into a DEPRESSION. Or maybe it’s simply a gremlin with the web server’s metric, first time in 23 months.
I heard a guy refer to 500K people in USA lodging for unemployment last week “for the first time”, following another 500K the week before. Might have been on Doogue RN abc last Saturday, if I heard that right (?!). No wonder Obama is ramping up the economic package in the 24 hr cycle today.
I don’t believe the ‘make a happy face’ brand of economic strategy will work. There is no point in being confident about a fundementally flawed situation. You can swing like your winning as much as you like, but with increased credit costs most people can’t support more debt. As Yoda put it; that means less spending, that means less business, that means less employment, which leads to suffering. We can mine the government coffers for while, but if that amounts to adding nothing but more debt on, say, first home owners grants rather than productive investment then it will just impoverish government services along with personal spending. We can drop interest rates for while, but that just promotes more of the same misallocation of funds and will keep the party going only for a short while longer.
Those advocating the confidence cure are basically asking anyone with savings at this point to run Kamakaze-like at the market in the hope of producing a bounce. Personally, I am not doing so particularly because those promoting mass suicide among investors on the sidelines will be the first to liquidate their positions if conditions even marginally improve.
While we should respect these financial institutions only because they still must employ clever, competent experts in spite of the organizations abysmal performance in the financial market place (which they were allowed to construct just as they wished) and listen to their messages and advise we should not believe them when they tell us when we will have our next root.
Marilyn, I wouldn’t go repeating any idiotic predictions made by Krugman.
He won a Nobel Prize for his detailed work on trade theory, but certainly not because of any succesful or meaningful understanding of macroeconomics. Krugman is a Keynesian, just like all of our treasurers and central bankers. Keynesian ideas caused this economic crisis.
Instead, you would be better served listening to people who actually predicted this crisis and understood the mechanisms involved. Peter Schiff or Nouriel Roubini are great examples.
You’d best read some of the Austrian economists to understand how central banks created this massive credit bubble. Rothbard, Mises, Hayek and Bohm-Bawerk have all shown Keynesian ideas are nothing more than a re-hashing of old failed mercantilist ideas.
Re Jono
Ok, so where are the closet Keynesians among the merchant banks that were fobbing off CDOs, Credit Default Swaps and other arcane instruments of the unregulatd free market? It seems to me it was the deregulate and let the market allocate as efficiently as always does crowd which produced this mess, and idealogical gymnastics are not going to get any of them off the hook.