Reserve Bank Governor, Glenn Stevens says the economy is going to get lower and slower before it improves, but he’s given governments the go-ahead to borrow if they are to keep the economy trundling along.
He told a Melbourne business dinner last night that while the outlook is serious, the long term outlook has not gone bad.
He indicated he had no objections to governments borrowing to help spend, so long as the spending was "worthwhile,"to help generate demand to soften the impact of the slump.
"If businesses remain focused on the long-term opportunities; if markets and commentators do the same; if banks remain willing to lend on reasonable terms for good proposals; if governments are able to so order their affairs as to continue supporting worthwhile – and I emphasise worthwhile – public investment (even if that involves some prudent borrowing); then Australia will come through the present period
The banks also must be prepared to lend on "reasonable terms" for good projects
"We face difficult circumstances.
"Policy-makers and regulators both here and abroad will need to stand ready to act promptly to provide any necessary support for the financial system and sustainable economic activity.
"In doing so, though, we need not, and should not, abandon the well-established and tested policy frameworks that are in place.
"In fact, it is these that have given Australia, in particular, ample scope to do what is needed in the current situation.
"Given that we have that scope, and given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness.
"Yes, the situation is serious. But, the long-run prospects for the Australian economy have not deteriorated to the extent that might be suggested by the extent of some of the gloomy talk that is around.
Earlier yesterday, RBA Assistant Governor, Malcolm Edey told a Sydney conference yesterday of its latest forecasts in last week’s Quarterly Monetary Policy Statement.
"Envisage a significant further slowing in the Australian economy from the pace recorded at mid year.
"Growth of non-farm GDP is now expected to reach a trough of 1 per cent in year-ended terms by the middle of next year, and to remain below trend for some time beyond that.
"Inflation is likely to fall. But it has to be emphasised that any forecasts in this environment are subject to a great deal of uncertainty, not least because the situation in world financial markets is still changing rapidly.
"In assessing the impact of all this on the Australian economy, it is important to take into account some significant factors working in the other direction.
"The official cash rate has been reduced by a total of 200 basis points since September.
"The fiscal package announced by the Government in October will provide a near-term stimulus of a bit under 1 per cent of GDP.
"An additional factor is the depreciation of the Australian dollar exchange rate, which in trade-weighted terms is down by about 25 per cent over the past three months.
"All of these factors will help to cushion the effects of the much more difficult global environment in which we now find ourselves."
The statistics out yesterday painted a gloomy outlook though for the economy and the car industry.
We had car sales slumping and an index of leading economic indicators sending a strong signal that the economy will slide into recession next year.
The news on car sales was gloomy and will worsen.
Like Europe and the US the past couple of months has seen a loss of faith by car buyers, although the reaction here is nowhere near the level it is in the US and Europe.
Australian new car sales were 10.6% lower than in October 2007 and down 0.5% on September 2008. But the year on year fall has accelerated from the 7.2% slump in August of this year, from August 2007.
European car sales were off 14.5% on the same month a year ago, and US car sales fell a terrible 32% in the same month on October 2007.
So while our industry is hurting, it’s nowhere at the level that the US or Europe is.
Nor Japan for that matter, as the head of Renault-Nissan told the Wall Street Journal this morning that Nissan’s second half profit (for the six months to March 30, 2009) would go to "zero" because of the slump in the US and Europe.
And Toyota has revealed more cuts to its US production levels in coming months as it tries to remain in profit across its worldwide operations. It’s adding non production days to its work timetable over Christmas New Year and thinking of eliminating some models from its 2009 line up because they can’t be produced without losing money.
While General Motors, Ford and Chrysler have the begging bowl out on Capitol Hill, Toyota, Nissan and other foreign producers are cutting output and battening down the hatches.
A German industry paper said last weekend that Daimler would cut production of its flagship Mercedes vehicles by more than 100,000 next year because of the slowdown in sales in Germany, Europe and North America.
Holden is already taking a gloomy view of the first quarter of next year with reports today that it had cut 25 production days from its work schedule. That means it is seeing lower sales, a situation that will be compounded by the disappearance of financiers, GE Money and GMAC from the end of the year.
The ABS figures yesterday revealed that total sales of new motor vehicles were 80,366 last month, compared with more than 90,000 a year ago.
The ABS said that when comparing October 2008 with September 2008, sports utility vehicles decreased by 2.3%, and passenger vehicles by 1.5%, while other vehicles increased by 3.6
