Australia | Feb 02 2009
By Chris Shaw
ANZ Banking Group senior economist Saul Eslake minces no words when describing the near-term outlook for the global economy as grim. On his numbers GDP in industrialised nations should decline by around 1.5% this year, the first full-year fall in output since the end of World War II.
Other regions will be similarly impacted as Eslake estimates growth in developing and emerging economies will slow to around 4.0% this year, well down from the average growth rate over the past five years of 7.5%. Adding this all up he expects global economic growth of just 1.0% this year, matching 1982 for the weakest outcome in the post-war period.
There is little in the way of good news accompanying Eslake’s estimates as while the downturn in manufacturing around the world may have moved beyond its most intense level, the ANZ economist notes job losses are increasing and adding to the downward pressure on consumer spending levels that have already been significantly impacted by falling asset values.
In Eslake’s view, the downturn in the global economy is likely to continue through at least the first half of this year. Even acounting for the measures taken by governments to stimulate growth, any subsequent recovery can be expected to be a hesitant one with scope for setbacks along the way, Eslake adds. This leads to a global growth forecast of just 3.25% in 2010.
Supporting Eslake’s modest growth forecasts is his view the financial crisis has not yet run its course but rather it has entered a new phase. Government guarantees have likely seen off the liquidity crisis and stimulus measures and special facilities introduced via the US Federal Reserve are improving activity levels in some debt security markets, but doubts still linger over the solvency of some banks.
This implies additional capital raisings by the banks, Eslake noting while since July of 2007 banks have raised more than US$800 billion in new capital they may yet have to raise just as much again to secure their capital positions. Reflecting this, there remains a lack of confidence in the market with respect to bank solvency and this will need to be addressed before any recovery takes hold in his view.
As asset prices and bank failures continue there is, according to Eslake, an increasing risk of deflation taking hold and this means ordinary policy measures such as cutting interest rates are unlikely to be enough. Fiscal policy must therefore play a greater role and this suggests increased budget deficits as governments introduce new stimulus measures, a policy response he suggests is appropriate given current conditions.
While the Australian economy showed great resilience in the face of the global downturn last year, Eslake makes the point Australia cannot remain immune. Thus a recession is likely this year, though deflation is a lesser risk given the large decline in the Australian dollar.
The bank’s forecasts call for The Reserve Bank of Australia (RBA) to continue lowering interest rates as it attempts to provide some stimulus, with the official cash rate expected to fall below 3.0% in coming months as the worst likely lies ahead for the Australian economy.
This reflects the end of the commodities boom as lower prices are yet to fully flow through in areas such as iron ore and coal and when this happens there is expected to be a decline in the country’s terms of trade of around 15%, which will in turn flow through into lower growth in national income.
Along with lower exports the end of the commodities boom also implies lower employment, while the adjustment in household balance sheets appears likely to be an ongoing process and means household consumption growth should be below trend levels, not only this year but for much of 2010 as well on the bank’s numbers.
One sector unlikely to be significantly impacted in the bank’s view is the Australian housing sector as while further modest price falls are likely the bank doesn’t see a US-type decline as likely. This is because affordability is improving and there has been little forced selling throughout Australia to date despite the rise in unemployment and falling household wealth levels.
With respect to unemployment in Australia, the bank expects a rate of around 6.0% by the end of this year and a peak of around 7.0% in 2010. This would be less than the increase during the recessions of both 1982 and 1991. One plus is Australia’s inflationary pressures have all but disappeared, with the bank expecting inflation to return to within the Reserve Bank’s target range of 2-3.0% by the end of this year.