Australia | Mar 04 2009
By Chris Shaw
The Australian economy is still technically not in recession, as defined by two successive quarters of negative GDP growth, but it is edging closer after a weaker than expected December quarter GDP outcome today.
GDP for the period fell by 0.5% against market expectations for an increase of 0.2%, TD Securities senior strategist Joshua Williamson suggesting the result was due to weaker than expected household consumption numbers and a large decline in inventories.
The former implies the government’s stimulus package is not having as great an impact as hoped, as ANZ Banking Group head of Australian economics Warren Hogan notes much of the stimulus for households appears to have ended up as savings rather than boosting consumption.
Australian Bureau of Statistics figures tend to support this view, as its numbers show the household savings rate for the December quarter rose to 8.5% – its highest since the last recession. Westpac agrees, noting the fall in consumption comes despite nominal household disposable income increasing by 11.4% over the past three quarters, showing savings have been the preferred option in recent months.
This is not all bad in Hogan’s view as it means households are repairing their balance sheets, which leaves them better placed to withstand future shocks such as falling property prices and rising unemployment. This may be necessary, as Williamson points out the December quarter GDP data shows output fell in over half the sectors of the economy, many of which are large employers. This suggests unemployment will track higher in coming months, meaning households will likely continue to be cautious with respect to consumption.
Income also fell in the period by 0.9%, with a decline in company profits contributing to the weakness in this number. Corporate profits were down 5.6%, which is the largest decline since December 2000.
Williamson notes the fall in growth represents the first outright decline in GDP since 1991 and brings the annual growth rate for the economy down to positive 0.3%. ANZ’s Hogan suggests while the fact 3Q growth was not revised from an increase of 0.1% means the economy is technically not in recession, there is scope to suggest the December quarter may be the start of one.
The big question in his view will be whether or not the fall in inventories in the December quarter is a one-off, as if there is a rebuilding of inventories in the current quarter, this will provide a boost to the growth numbers.
Post today’s data Hogan expects the Reserve Bank of Australia (RBA) will need to lower its growth expectations for the economy but he doesn’t see it as forcing the RBA to change its current course. This implies further rates cuts in coming months but the easings in his view will be gradual, with the bank expecting a 0.25% cut in April against current market expectations of a 0.5% decline.
Williamson suggests the data will also result in additional fiscal stimulus measures, likely accompanying the Federal Budget in May. While this means household consumption is unlikely to detract from growth, the bigger risk in his view remains the overhang of business investment as further weakness is likely here.
This would detract from expenditure side of GDP growth and supports his view the RBA will begin to lower rates again from next month, with his forecast calling for interest rates to trough at 2.0% or lower in an attempt to avoid any further fallout from the global economic crisis.
The only positive news to come from today’s result, as noted by CommSec chief economist Craig James, is that even though the Australian economy contracted in the December quarter we managed to outperform all other industrialised nations by quite a large margin over the period.
Given the weakness elsewhere, James suggests the data today was not a great shock but he continues to view it as a slowdown for the economy and not an indicator of an impending recession. Like Hogan he sees inventories as a key and suggests it won’t take much for sectors such as construction to again ramp up activity levels given factors such as low interest rates and fiscal and monetary policy stimulus.