This morning we had the first official forecast of a recession from the authorities, and it came four days before the 2009-10 Federal Budget on Tuesday night.

And despite solid March retail sales, building approvals and those “rubbery” jobs figures for April (Seasonally adjusted, not trend, which shows unemployment continuing to rise), the RBA now believes the Australian economy will slide by 1.25% in the year to June, 2009, with most of the plunge happening in this half of the year.

The bank had previously forecast a small 0.25% growth rate for the year to June.

It also sees inflation easing slowly this year (and there is a detailed explanation why), before falling faster over 2010.

Despite the forecast of negative growth, the Australian economy will be doing better than Japan (down around 3.3% over the next year, the US, down by around 3% after a 6.1% annual slump in the March quarter) and Europe, down by around 4% or more in some countries over the rest of 2009 (More in Ireland and 3.8% for the UK).

In its latest monetary policy statement, the RBA said this morning that growth in the year to June, 2009 would be 1.25%, for the year to December this year (i.e. calendar 2009), it would fall 1%. In the year to June 2010, the economy is forecast to grow by 0.5%, and in calendar 2010, the growth figure is estimated at 2%.

Growth in the year to December 2008 was 0.3%, after an earlier forecast of 1% in the February, 2009 Monetary Policy Statement.

As growth rose 0.1% in the September quarter last year and then fell 0.5% in the December quarter, the RBA believes growth will plunge by over 1% in the current six months (or 2% annualised). There is a slow rise expected in the final quarter, while the 2% growth figure in the year to December, 2010, indicates there will be a substantial rise expansion, more so than apparent from the bank’s statements.

In fact if Australia achieves growth of 2% in calendar 2010, it would be the best for three years. That might be a tepid rebound, but it could very well be stronger than that experienced by many of our trading partners.

Non-farm growth is forecast to fall 1.5% in the year to this June and 1% over calendar 2009, before recovering over 2010. The fall in non-farm growth will reflect slowing construction (housing) and the fall in our terms of trade from falling export income.

Inflation is forecast to fall to 1.5% in the year to June this year, before rising to 2% over 2009 and 2.5% in the year to June 2010. Underlying inflation though is expected to slow this year and to be running at an annual 2% or so in the back half of 2010.

The central bank left its bias to cutting interest rates in the latest Monetary Policy Statement, making a more detailed explanation after outlining the new approach in the post board meeting statement on Tuesday by Governor, Glenn Stevens.

“With interest rates at historically low levels, and some signs of stabilisation in the world economy, the board has recently viewed it as appropriate to make small and less frequent adjustments to the cash rate than was the case up until February when conditions were deteriorating rapidly,” it said in its quarterly statement on monetary policy released on Friday.

“In assessing whether further reductions are appropriate over the period ahead, the board will continue to monitor the implications of both economic and financial developments for prospects of a sustainable recovery in the Australian economy.”

The bank warned that the risks remain on the downside for the world economy, even though it sees the recession easing:

“Given the speed with which the outlook has deteriorated over the past six months and the extraordinary policy responses that have followed, these central forecasts are subject to a number of significant near-term risks.

“One is that further bad news emerges about the US and European financial systems, undermining the gradual recovery in confidence and causing a further increase in risk aversion.

“If this were to occur, the scope for policy-makers in many advanced countries to take further steps to restore confidence may be constrained by the already large fiscal deficits and the fact that interest rates in many countries are already close to zero.

“Another downside risk is that the recent signs of recovery in China do not turn out to be durable. In the other direction, significant policy stimulus has been put in place in many countries and there has been a more positive tone in financial markets recently.

“There is some possibility that as signs of stabilisation emerge, and the lack of confidence and risk aversion that has characterised the world economy over recent months is reversed, firms that have delayed investment plans will decide to move forward more quickly than currently expected, contributing to a stronger global recovery.”

Peter Fray

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