We are all going to be poorer and feel poorer over the next couple of years, according to the second most senior bloke at the Reserve Bank, Deputy Governor, Ric Battellino.
But at the same time, he believes there’s a reasonable chance we could escape an actual recession, despite forecasts of such a slump by the likes of Goldman Sachs JBWere and JP Morgan in the past week or so.
And Westpac Bank yesterday said it saw no reason for Australia to enter a recession as it said it was looking for growth of around 2% next year.
That’s unlike the US where growth contracted 0.3% in the first estimate of third quarter economic growth, the biggest fall since 2001 and the second within a year.
Consumer spending suffered its biggest fall in 27 years and the first in 17 years as tens of thousands of Americans lost their jobs and or their homes and simply stopped spending money on food, cars and the like, homes, you name it.
It was a depressing report and economists now expect growth in the current quarter to contract by more: estimates of a fall of 2% and more were being made this morning.
Even though we in Australia face an uncertain year and a possible slump, we will not face the bitter and deep recession that Americans are now enduring.
But it will get tougher here, which means lower sales for retailers, home builders and others serving the consumer. In our national accounts for the June quarter, consumption fell 0.1%, the first fall since 1991. In the US the fall was a huge 3.1%.
That tells us something about the relative intensity of the two economic slowdowns.
Westpac rival, the National Australia Bank has said (this week in its monthly business survey) that it believes growth will slow, but not contract, but unemployment will rise to 6% over the next couple of years and the present budget surplus of around $22 billion, will become a deficit of around $10 billion in the same period of time.
That will mean a slowing in loan growth for banks and downward pressure on earnings in 2009 and heading into 2010.
In a speech to a Sydney conference yesterday Mr Battellino said Australia was going through "uncertain financial times at present which is leading some to question whether the period of prosperity that has been running for almost two decades has come to an end".
"The next couple of years will be noticeably more subdued than the past five. We should not be surprised by this as the income and wealth generated over the past five years were simply extraordinary.
"While nobody can predict accurately all that lies ahead, it is important not to become too pessimistic because, fundamentally, household finances and the economy more generally remain in good shape.
“The main problem that had built up – inflation – is manageable and is being dealt with.
"By definition, the economy must grow at a below average pace for some of the time. These periods provide the economy with the breathing space to sustain the expansion. There is no reason to assume that the next year or two will not do the same."
"Australia managed to sidestep the 2001 global recession. Can it do that again?" he asked.
"That is certainly what we are aiming for, and there is nothing in the data to date to suggest that we are off track.
"But the economy is being affected by powerful forces from different directions, and it is unclear what the net effect will be. The impact of global developments is particularly uncertain.
"We also have to recognise that the task of managing the economy this time will be more difficult than in 2001 because we are starting with a bigger inflation overhang."
And that comment got market economists wringing their hands and claiming that the bank would no longer be cutting rates as deeply as thought.
"The (Reserve) Bank has for some time thought that inflation would peak in the second half of 2008 and then fall; accordingly, we have acted pre-emptively in reducing interest rates.
"Nonetheless, there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy."
That had the market economists then wondering if there would be a cut at all next Tuesday.
But one of those economists, Rory Robertson of Macquarie Bank wrote before the speech that he was looking for more rate cuts from the RBA by the end of the year.
"I’m still expecting 100bp worth of further cuts (to 5%) before Christmas, in 50bp lots in November and December. The (likely) cut next Tuesday will come at 2.30pm, just half an hour before the 3pm running of this year’s Melbourne Cup.
"Some have argued that Canberra’s recently announced fiscal easing (worth nearly 1% of GDP) substantially limits the RBA’s room – and inclination – to cut further before Christmas. I doubt it.
"In my opinion, the alarming deterioration of the global outlook and sharply increased risk of recession in Australia mean there is plenty of room for both further cuts in interest rates AND the announced fiscal stimulus."
Mr Battellino’s speech was an update on "household finances”.
His appearance was rare, coming so close to a RBA rate setting board meeting on Tuesday.
Another senior RBA official, financial markets boss, Guy Debelle, is due to give a speech in Melbourne today updating us on how the bank’s market operations have been going during the most volatile
