The Australian economy finally succumbed to the global downturn in the December quarter with GDP falling 0.5%. We are now effectively in recession. In the absence of Government stimulus the fall would have been even steeper.
The AMP’s Dr Shane Oliver says the recession probably has another 6 to 12 months to run.
The global slump has yet to really hit our exports and leading indicators are continuing to slide.
On average, Australian recessions last approximately 12 months; company profits are likely to fall 20 to 30% this year and the cash rate has more downside.
The Australian economy finally succumbed to the global downturn in the December quarter with GDP falling 0.5%. We are now effectively in recession.
In the absence of Government stimulus the fall would have been even steeper.
- The recession probably has another 6 to 12 months to run. The global slump has yet to really hit our exports and leading indicators are continuing to slide. On average, Australian recessions last approximately 12 months.
- Unemployment is likely to rise to 7% by year end before peaking next year around 9%. The recent up-tick in the housing market is likely to be just a false dawn before more weakness, company profits are likely to fall 20 to 30% this year and the cash rate has more downside.
The decision by the RBA to leave interest rates on hold was premature.
- Fortunately, the absence of housing oversupply, the fall in the $A and quick stimulatory action by the authorities should mean that the recession in Australia will be milder than that already underway in most other developed countries.
Australia has effectively entered recession
The December quarter national accounts showed GDP falling 0.5% (after +0.1% growth in the September quarter), which took growth for the year to the December quarter to just 0.3%.
While Australia hasn’t yet met the so-called technical definition of recession (entailing two consecutive negative quarters) for all intents and purposes Australia has entered recession – non-farm GDP has fallen for two quarters in a row and other measures of economic activity such as employment and industrial production are now falling consistent with a recession having commenced.
While net exports added strongly to growth in the December quarter, both business investment and consumption were softer than expected and growth generally was dragged down by a continuing slump in dwelling investment, falling profits and broad based falls in production.
Australia’s 0.5% slump in GDP is a far better outcome than the December quarter slumps of -1.6% qtr on qtr in the US, -1.4% in Europe and -3.3% in Japan. Unfortunately, though there is more bad news ahead for Australia.
Expect more weakness ahead
There are several reasons to expect the recession to deepen over the next six months.
Firstly, the global economy is continuing to worsen.
Leading indicators for developed and developing economies are still falling & show no signs of recovery yet.
During past recessions, the slump in the global economy normally led the Australian economy by around 6 to 12 months.
The table below provides an indication of what is coming down the line in terms of the likely hit to our resources exports.
The table shows growth in GDP and exports for our top ten trading partners (which account for roughly 75% of our exports).
Eight of our top 10 export destinations are now in recession.
Only China and India are still recording positive year on year growth, but both saw growth virtually stall in the December quarter.
More worryingly, all bar two of these countries have seen their exports fall over the last year, in some cases very sharply. It’s only a matter of time before
Eight of our top 10 export destinations are now in recession.
Only China and India are still recording positive year on year growth, but both saw growth virtually stall in the December quarter.
More worryingly, all bar two of these countries have seen their exports fall over the last year, in some cases very sharply.
It’s only a matter of time before this hits Australia.
Most of these countries export processed items like cars and electronics.
Australia’s raw material exports are key inputs and so will be hit hard over the year ahead.
So while our export volumes are still up over the past year, a sharp fall is likely this year.
Our leading indicator points to Australian GDP falling further.
This reflects the fall in consumer and business confidence, the continuing slump in housing related indicators and the slump in global growth.
Finally, in terms of the specific components of growth:
While lower interest rates and Government payments to households will help consumer spending, this will likely be offset by low consumer confidence, the deteriorating labour market and the continuing slump in household wealth since 2007 highs (which so far amounts to a 10 to 15% decline).
The caution on the part of households is indicated by the rise in the household savings ratio to 8.5%, its highest level since 1990, which indicates that households are saving the bulk of the payments to them from the Federal Government.
A further rise is likely in the current quarter.
The good news is that boost to the household sector from the Federal Government is allowing households to pay down debt with
