Now for life in the economic trenches. Growth has gone, vanished for quarters to come.
Rate cuts now will come, in fact a 0.50% cut in official rates is certain to happen next month after yesterday’s poor growth figures showing a fall in growth of half a per cent, that would have been much larger if not for the early impetus of the spending package and the better conditions for rural Australia (compared to the misery of the year before).
The global slowdown cut export growth, especially in December, and that will only worsen this quarter and in coming periods.
Tuesday’s forecasts from Abare for a slump in commodity export income, especially over the next 18 months to two years, will give us some painful times ahead.
And after the rates have been cut, it will be time to knuckle down to ride out the slump; in fact you should have started that process months ago.
Federal Treasurer, Wayne Swan warned:
"There are no quick fixes to the global recession, and many of its effects are yet to be fully felt. But the Government is doing everything in its power to cushion Australians from the worst impacts of the global recession."
It remains true that we are still better off than our major trading partners (especially Japan, the US, NZ, Taiwan, Korea, Singapore) and it is true there are more suggestions that China may be bouncing, but they will be whatevers and maybes for quite a while.
Unemployment has to rise, growth slow further; demand ease and exports fall sharply, delivering to the economy a demand shock of our own and one being felt in our major trading partners.
Despite continuing signs of some solid activity in January, forecasts will have to be rewritten downwards, especially by Canberra and the RBA.
As Macquarie Bank’s Rory Robertson said yesterday after the national accounts for the 4th quarter were released:
"A 50bp cut in April from the RBA now seems likely, particularly if full-time employment shows a significant drop when the February data are published" today week.
"And with the Australian economy now confirmed in recession, in my opinion, and the global economic and financial backdrop bleaker than it has been in many decades, my guess remains that the RBA will be forced to cut to 2% by year’s end, if not earlier. Policymakers are hoping not to be forced to cut below 2%.
"Non-farm GDP shrank by 0.8% in Q4, following a 0.2% decline in Q3 (revised from down 0.3%). For all intents and purposes, the Australian economy has been confirmed to be in recession, as argued here over recent months.
"The RBA and many others will need to revise their GDP forecasts. In particular, the RBA will need to pare its forecast for non-farm GDP over the year to Q2 from flat, to down 1-2% or so.
"The sheer power of the global downturn in Q4 and now over 2009 – after the collapse of Lehman Bothers in mid-September – made recession in Australia inevitable, despite the RBA’s extraordinary 4pp worth of rate cuts since September, Canberra’s timely and substantial fiscal easing over recent months, and despite the helpful 30% or so drop in the A$ since mid-2008.
"These three cushions couldn’t prevent recession but do ensure our economy over 2009 will be significantly stronger than it would otherwise have been."
As Federal Treasurer, Wayne Swan said yesterday:
"Against the backdrop of the sharpest synchronised global downturn in generations, Australia has held up better than most other countries. Many countries including the United States, the UK, the Eurozone and Japan suffered much deeper contractions in GDP in the December quarter. Australia’s GDP outcome is better than all of the G7 economies.
"19 of the 22 OECD countries that have reported December quarter figures contracted during the quarter and this weakness continues to weigh heavily on household spending, investment and exports.
"The National Accounts show household consumption grew by 0.1 per cent in the December quarter as the effects of the global financial crisis on wealth and confidence continued to weigh on households.
"Business investment growth slowed further in the quarter to 1.1 per cent.
"Business confidence has been hit hard by the steady stream of bad news from overseas and by the prospects of weaker demand and falling profits.
"Nonetheless machinery and equipment investment rose by 0.3 per cent and non dwelling construction rose by 1.9 per cent. Major private engineering projects continued to underpin investment. Businesses reduced inventory levels during the quarter, aligning their production with expected demand.
"Dwelling investment continued to weaken, although the First Home Owners Boost and lower interest rates should support activity during 2009.
"Exports weakened in the quarter, particularly non-rural exports, which are being adversely affected by the dramatic slowdown in China and by the sharp contractions in our other major Asian trading partners such as Japan and Korea. Imports contracted sharply, partly reflecting weaker domestic demand, the sharp fall in the exchange rate and the consequent reduction in inventory levels by businesses.
"The global economic environment is clearly very challenging and it is likely that global conditions will get worse before they get better. Nonetheless, Australia is better placed than most other countries to ride out the global economic storm.
"Australia’s financial system is strong and well regulated. Our banks are well capitalised and profitable. We have not suffered the acute financial stresses that banking systems in many other countries have experienced. Australia’s housing sec
