What a turnaround! Just as the gloomsters gather to chortle over our housing crash, a severe recession, and worse, out of the blue the market bear appears to be turning.

Economists at Goldman Sachs JBWere were among the first in the business sector to whisper, then call “recession” last year.

Now, in a major surprise, they have become the first to call an end to the current slowdown.

In a note to clients this morning, Goldman Sachs’ Tim Toohey said:

Although we are expecting Australia’s economic recovery to be modest by historical standards, our forecasts are now relatively strong by comparison to other forecasters.

In our view Australia is far more advanced into its recession than the single quarter of negative GDP growth indicates and appears far closer to the recovery phase than most forecasters are willing to acknowledge.

The distinctive feature of our forecasts is that we still expect Australia to show a meaningful recovery in economic growth in 2H09.

This view is partly a function of the record monetary and fiscal stimulus being imparted upon an economy that has not been experiencing the type of banking sector stresses and credit rationing evident in other developed nations.

But don’t expect job losses to suddenly slow — employment is a lagging indicator (it held up as we slowed last year and in the first two months of 2009), it will continue to be a drag while the economy recovers.

Though we are looking for the recovery to commence in the June quarter of 2009, our forecasts imply that the unemployment rate will deteriorate by over two percentage points in the first 12 months of the recovery.

This is significantly worse than the June 83 recovery, when the unemployment rate peaked shortly after as well as the September 91 recovery, during which the unemployment rate deteriorated by a further percentage point. This relatively negative outlook is premised on the fact that we continue to expect growth to track below potential for some time during the recovery.

The report came as New Zealand confirmed that its economy shrunk by 0.9% in the 4th quarter, worse than our 0.5% fall, but nowhere near the 1.7% fall in the US or the massive 3.2% plunge in Japan (quarter on quarter). And not as bad as falls in Brazil, Germany, the UK, France and Canada.

In fact, New Zealand, like Australia, seems to be bearing up better than most other economies in the worst slump since the Great Depression.

The fall was the largest in NZ since 1992, but still slightly better than expected with the median prediction of economists in a Reuters poll of a fall of 1%. On Thursday, the International Monetary Fund said it expected the New Zealand economy to contract by 2% this year.

In Australia, quite a few economists are forecasting our slump to deepen as the year goes on, but not the mob at Goldman Sachs.

“In early 2008 we focussed on the combination of declining confidence, falling financial asset values and tightening financial conditions as the forces that would drive Australia into the slowdown. We expect the sequencing of the recovery to be met in the reverse pattern.”

So far, financial conditions have eased dramatically in Australia, NZ, UK and more recently in China.

“Allocators of risk capital are again dipping their toes into the water on the basis that the valuation signals look compelling and economic dataflow suggests that the most rapid period of the economic decline is past. An improvement in asset prices ultimately will be crucial in underpinning a lift in business and consumer confidence levels and setting the stage for a more sustainable economic recovery.”

The second half recovery will partly result from “the record monetary and fiscal stimulus being imparted upon an economy that has not been experiencing the type of banking sector stresses and credit rationing evident in other developed nations.

“We believe we are capturing the extremely challenging external environment via forecast record declines in export earnings and a relatively sharp decline in business investment through 2009 and 2010. Nevertheless, it is worth noting that there are also some signs of stability emerging in the international dataflow.”

In fact, Goldman Sachs JBWere would find itself closer to the views of the Reserve Bank than many other forecasters after being out on their own for a while, then in the pack.

This is not to say there won’t be further problems in the next few months with growth slowing further, but this is the sort of guarded hope we have heard from the RBA and Governor Glenn Stevens in recent days.

Peter Fray

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