The National Australia Bank has further cut its forecasts for the local economy for the next two years after its latest business survey (see next story) found a sharp downturn in business conditions, especially in the outlook for employment.
This will lead to the Reserve Bank cutting rates by a bit more than expected: another 1.25% over the rest of 2009.
"We have lowered Australian GDP forecasts in 2009 to -1% and to +0.9% in 2010. The bank said, indicating that it still sees a rebound next year.
"These lower growth forecasts reflect the poor start point in late 2008 and early 2009, together with forecast weaker exports and business investment as the global economy / trade shrink further and business cuts back on employment and capex," the NAB said yesterday.
The bank says it now sees unemployment worsening "faster and further reaching 6.5% by end 2009 and 7.5% by late 2010.
"In these circumstances, we see the RBA as eventually needing to get the cash rate down to around 2% – with cuts of around 100 points in Q3 and a final 25 points in late 2009.
"With GDP now forecast to shrink this year, non-farm growth will fall by around 1.25% in 2009 and a rise of around 0.75% in 2010.
"In financial year terms we expect GDP growth of +0.3% in 2008/09 but -0.6% in 2009/10.
"When an economy shrinks over a 12 month period that clearly represents a recession.
"Indeed it seems likely that Australia effectively entered recession in late 2008. Our forecasts imply a moderate recession in 2009 – it would no longer be appropriate to classify these forecasts as a mild recession (our previous terminology);
"It needs to be stressed that we see no fast recovery in Australian activity.
"That is, the path of growth is more U than V shaped – with recovery not really getting underway till 2010. This shows up most in the financial year forecasts and especially that for 2009/2010.
"The driving forces behind these revisions are the lower start point in Q4 as implied by the National Accounts and in Q1 as implied by the Survey.
"More fundamentally, we have revised down exports to fall by around 10% (previously -6%) in light of the weaker world outlook.
"As well as the volume effects there are also value effects via falling terms of trade.
“Our forecasts have commodity prices falling by around 28% in 2009 and another 7% in 2010.
"This means the terms of trade in 2009 are likely to fall by a further 25% during 2009 and then marginally (-2%) in 2010.
"That global outlook has also seen us lower our expected USD / AUD path to around 70c by mid 2009 and around 76c in 2010."
