Australia | Dec 03 2008
By Chris Shaw
Cuts to official interest rates in Australia are coming thick and fast now, with 3.0% of cuts over the past couple of months as the Reserve Bank of Australia (RBA) attempts to stave of recession. The question is: does more need to be done? Today’s GDP growth figures for the September quarter suggest the answer is yes; more action is necessary.
Australian GDP for the September quarter recorded a rise of just 0.1%, which at face value was below market expectations of a 0.2% increase. However, growth for the previous quarter has been raised by 0.1%. This puts growth at 1.9% for the year including the revision for the June quarter to 0.4% from 0.3% previously. The biggest disappointment for the September quarter, comments Westpac, is that non-farm sector GDP fell 0.3%.
In other words: Australian growth may have remained positive thus far, it was only by the slightest of margins. Excluding the expected recovery for the agricultural sector, the economy is shrinking.
As TD Securities senior strategist Joshua Williamson points out, this annual growth rate of 0.7% is Australia’s lowest for seven years and is likely to fall even further. This is because the non-farm economy will remain weak as households unwind several years of debt driven expenditure growth.
As well, Williamson points out the global growth outlook also worsened in the December quarter. This will put additional pressure on Australia’s growth rate. To reflect this, he expects the RBA has further to go in terms of lowering interest rates even after yesterday’s 1.0% cut. Williamson expects a further cut of 0.75% in February.
Commonwealth Bank chief economist Michael Blythe believes the economic stimulus being provided via lower interest rates and the recent stimulus package announced by the Federal Government should be enough to allow the Australian economy to avoid sliding into recession. Blythe acknowledges the margin for error remains very thin.
He points out the weakness in consumer spending in recent months is being offset by slightly stronger than expected business investment. however, part of the issue for households is a lack of desire to spend at present given a weakening employment market and falling wealth levels as both equity markets and house prices fall.
While as Westpac notes, falling petrol prices should generate something of a pickup in consumption, Blythe expects unemployment to rise in coming months. This will act as a further weight on household spending levels. Unlike TD Securities, Blythe expects future rate cuts to be at a more modest pace. His forecast calls for 0.5% in cuts early in 2009 before a more lengthy pause, with future action to then depend on the state of the global economy.