Australia’s gross domestic product (GDP) fell 0.5 per cent in the three months to December with a nervous Wayne Swan fronting the media to relay the bad news. In the lead up, economists had been expecting positive number, but the contraction will now mean that official interest rates are almost certain to be cut again when the Reserve Bank meets next month.
So what does the data mean for the Australian economy? Is this the beginning of the end of the recession or a sign of impending doom? Crikey asked a group of leading economists for their views:
Adam Carr, ICAP Senior Economist: In the lead up, indicators had been suggesting that we’d get a positive number and that clearly wasn’t the case. The production side of the accounts have collapsed especially manufacturing. I think looking onwards it’s going to be a very close call whether we’ll be in a recession or not — there are reasons to think this may represent a trough, especially given that the public side of the accounts have ample scope to pick up, with the government spending a lot of money. Also it gives us more time to see if the stimulus package has any effect. So, overall it’s a terrible result but this could be the worst if it.
Shane Oliver, AMP Capital Investors: There’s no doubt that this is the beginning of the recession and there’s no sign that the end is near and certainly no sign of any looming uptick. The debate in this country over whether we’ve gone into recession is basically irrelevant — we can still have that debate unfortunately because we haven’t had two quarters in a row of negative growth. But for all intents and and purposes this country has gone into recession and we should get off that debate and focus on what to do about it.
The economy is much weaker than both the Reserve Bank and Federal Government had assumed just a few months ago and the consequences are going to be much higher unemployment and a period of hardship for the economy over the next 6 to 12 months. Fortunately, interest rates have come down aggressively and with the fiscal stimulus package kicking in I have no doubt that policies last year the have worked to some degree. But I think we need to see further policy going forward including future rate cuts and the fiscal stimulus.
Paul Brennan, Citigroup Head of Economics: I think basically what the figures indicate is that once you get households and businesses deleveraging there’s a limit to what policy can do. Basically that delveraging has to run its course and what policy can do is speed that adjustment and there is every indication it’s working. The saving rate has gone up dramatically to 8.5% of household income and it’s got further to go, back to the level of the last recession. So we’re getting there and looking ahead companies have cut their inventories very aggressively so that sort of says that the adjustment in the economy is preceding very quickly. We’re still in better shape that the rest of the world in that regard.
Professor John Quiggin, University of Queensland: I guess for all sorts of PR reasons it’d be nice to have a positive number but the fact is a number near zero was generally within expectations. I think that based on what’s happening in the global economy we’re going to see a downturn for some time to come but we remain in a position where the Australian economy is doing surprisingly well. And we’re even seeing a relatively small current account deficit. That led people to speculate that the GDP number would be positive, because resolving those imbalances in trade and the current account deficits is an unimportant part of fixing the crisis.
At the aggregate level, Australian households have a bit of time to get their balance sheets in order before the domestic economy turns down. If the first round of stimulus had some positive effect then we may see a relatively mild slowdown. Right now, we really need to be looking hard at the budget and not saying “now we’ve had the stimulus package we get back to resuming the program that we had before”. The previously-announced tax cuts need to be dumped and the government has to play a bigger role for quite some time to come. If the negative number reminds us we’re not totally immune from the rest of the world, then that’s a good thing.