Friday saw the Reserve Bank issue its first monetary policy statement for 2009, with forecasts for slowing growth, falling export income, rising unemployment, and a fall, then rise in inflation over the course of the year.
The outlook supports that from the Federal Treasury earlier in the week which was issued as part of the package of measures and background for the $42 billion economic stimulus package.
As well look at the flow of information on the economy in coming weeks and months, keep the RBA’s forecasts in mind.
It’s clear that without the December and the current stimulus packages, the Australian economy stands a very real chance of drifting into negative territory: as it is, it will be very close: non-farm growth if forecast at zero midway through the year.
The Reserve bank points out that such are the unknowns globally and locally, that these forecasts contain a "significant" amount of uncertainty, which much of that on the downside.
Business investment, employment, the health of the global economy, the state of the US, Japanese and Chinese economies are only some of the imponderables that will impact the health of our economy over the next year or more.
Here’s what the RBA said in its economic outlook section:
The developments
in the world economy and the softening in commodity markets will be reflected in a significant decline in Australia’s terms of trade.
Export prices for base metals and rural commodities are significantly lower than in mid 2008, and US dollar- denominated prices in spot markets for coal and iron ore remain well below the current contract prices despite production cuts by producers in Australia and elsewhere.
A large fall in the terms of trade is expected in the first half of 2009 as renegotiations of annual contract prices for coal and iron ore take effect. Overall, the terms of trade are forecast to decline by around 20 per cent between late 2008 and early 2010, implying a significant reduction in real domestic income.
Domestic activity The forecasts for the domestic economy incorporate the planned significant fiscal expansion announced in late 2008 and early 2009. Taking the measures for 2008/09 and 2009/10 together, the discretionary policy actions sum to around $50 billion, equivalent to around 2 per cent of GDP a year.
In addition, the forecasts reflect the 4 percentage point reduction in the cash rate since September 2008. The technical assumption is that the cash rate remains at 3.25 per cent, while the exchange rate is assumed to remain near its current level and the oil price assumption is based on pricing of near-term futures contracts.
Sentiment in financial markets is assumed to remain fragile for some time.
The sharp contraction in the global economy in late 2008 suggests that the near-term growth outlook is materially weaker than projected in the November Statement. However, it is likely that the slowdown in Australia will be less severe than in many of our major trading partners.
This partly reflects the stronger momentum in the Australian economy in the period leading into the global crisis.
As in other countries, there has been a significant monetary and fiscal easing in Australia.
But given the predominance of floating rate debt in Australia and that the Australian financial system is in stronger shape than elsewhere, the easing in monetary policy is resulting in a larger fall in borrowing rates and more effective transmission of monetary policy.
In addition, the depreciation of the exchange rate over the past half-year will help to moderate the effect of the global slowdown on the import-competing and export sectors.
Growth in GDP is now expected to slow from 1.9 per cent over the year to the September quarter 2008 to around ¼ per cent over the year to mid 2009.
The economy is expected to begin to pick up from late 2009, with quarterly growth gradually recovering to around trend rates by late 2010.
This forecast implies a very significant easing in capacity pressures in the economy.
The projected weakness in real GDP coupled with the large fall in the terms of trade implies a sharp fall in real domestic income, which is forecast to contract by around 4 per cent over 2009.
However, the significant foreign ownership of the mining sector means that part of this reduction will be borne by foreign shareholders (just as they shared the gains as export prices rose), so the fall in real income accruing to Australian residents will be somewhat smaller, though still substantial.
Consistent with the large fall in income, real gross national expenditure is forecast to contract modestly through 2009, offset by a contribution to growth from net exports as a result of the depreciation of the exchange rate.
Growth in household consumption spending is expected to remain subdued over much of the forecast period, given an expected weakening in employment and the decline of around 10 per cent in net worth over the past year as a result of the sharp fall in the equity market and smaller fall in house prices.
However, the significant fiscal stimulus to households will provide support to consumption over the first half of 2009 and growth in spending is subsequently expected to gradually return to more normal rates.
In the near term, dwelling investment is likely to fall significantly, given recent trends in building approvals and dwelling commencements.
The Bank’s liaison with developers has also indicated a significant reduction in the availability of credit for new development, which may slow the recovery in the near term.
