When politicians forecast a recession, the market yawns; but when a senior bigwig at the Reserve Bank makes the same forecast, we all sit up and take notice.
So when RBA Deputy Governor, Ric Battellino told a conference in Brisbane this morning that our economic growth will fall this year, it cemented the view that Australia is on its way to a recession.
His speech was an update of the Australian and international economies and contained this comment:
These measures will go a long way to offsetting the negative influences on the economy coming from abroad, but the reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world. As such, GDP is likely to fall in 2009.
Even so, Australia will remain one of the better performing economies in the developed world and be well placed to benefit from the renewed global expansion when it comes.
It’s a line that didn’t feature as directly as that in the RBA’s latest Financial Stability Review last Thursday, although there were quite a few hints strewn throughout that document.
There was no estimate of the size of the fall, but you’d have to bet that the recession will be declared when the GDP numbers for this current quarter are issued in around two month’s time. The economy contracted by 0.50% in the December quarter from the September quarter.
But Mr Battellino went out of his way to make the point that Australia had “weathered this global downturn better than most”:
We have had more scope than others to move policies in the expansionary direction and our banks, being largely free of problem assets, are in a position to keep supplying credit to the economy.
While the Australian economy has also weakened, it has held up better than most during this difficult period, helped by earlier disciplined policies and prudent financial behaviour.
However, there are limits on how much we can insulate ourselves from what is happening abroad, and therefore there are probably still some difficult times ahead.
Nonetheless, the underpinnings of the Australian economy are sound so we are well placed to benefit from the global economic recovery when it comes…
Governments are also supporting the economy with increased spending. Perhaps the best single measure of this is the change in their fiscal position.
Across all levels of Australian governments, last financial year there was a fiscal surplus of 1½ per cent of GDP. This year, it is estimated there will be a deficit of 2½ per cent of GDP. This turnaround – about 4 per cent of GDP – is the largest in the post‑war period.
With this contraction forecast for growth now official, he also made the point that the bank had room for further rate cuts, if needed. With the bank’s board meeting a week today in Brisbane, the betting now is that we can expect a trim at least.
Figures out tomorrow on retail trade and building approvals in February will play a big part, as will the February trade figures on Thursday, and the course of the markets in the next few days.
But after sitting pat in February, the market is now expecting at least a cut of 0.25% next Tuesday.
In his speech on the global and Australian economies (which continued the approach of last week’s Financial Stability Report), Mr Battellino discussed the way the bank’s interest rate cuts have been passed through in Australia by the banks to borrowers.
“The monetary policy transmission process has been effective and there remains scope to ease policy further if circumstances require.”
His comments came just before the RBA released credit figures for February showing a flat month with no growth. That surprised the market which had been looking for a rise of 0.4% after January’s surprisingly strong 0.6% rise.
That dropped growth in the year to February to 5.4%, from 6.1% for the 12 months ending January.
A solid rise in owner occupied housing (the first home owners grant in action) offset falls in personal and business lending in the month. The fall in business lending was 0.6%, which cut annual growth to 5.5%. The rise in owner-occupied housing was 1%, (plus 0.7% in January) which produced the first rise in annual growth in this area housing credit to 8.6%, from 8.4% in January. It was the best monthly rise since late 2007.
The fall in business credit growth was the second in three months and will start worrying policymakers if repeated.
Non-housing personal credit also fell, down 0.8%, the fifth monthly fall in a row as the annual growth contracted at an annual rate of 6%. This is mostly a continuing fall in margin loans as the stockmarket fell from October onwards.
The trend in credit has been one of an economy slowing. The housing splurge for first home buyers will help soften that slide.