Australia | Mar 05 2009
By Chris Shaw
In the view of Bank of America-Merrill Lynch yesterday’s surprising weak GDP data for the December quarter showed the Australian economy is being overwhelmed by the global financial crisis and the impact it is having on credit markets, asset prices and imbalances on household sector balance sheets.
The data revealed the non-farm economy is clearly in recession, a view shared by GSJB Were as it notes after non-farm sector GDP fell 0.3% in the September quarter it was down an additional 0.8% in the December quarter. As Deutsche Bank puts it, the global economy has turned from a tailwind into a headwind, a trend confirmed by the fall in Australia’s terms of trade.
Having risen by more than 21% in year-on-year terms in the September quarter, GSJBW Australia’s terms of trade fell by 2.8% in the December quarter and could decline by as much as 25% over the course of 2009. This means after domestic policy intentionally drove the household sector into a recession earlier in 2008 the global downturn has now pushed the corporate sector into a similar situation.
On Bank of America-Merrill Lynch numbers, the Australian economy is lagging the global cycle by 6-9 months so the full extent of the external income shock will only be felt in the June and September quarters. This means the risk to consensus growth forecasts remains to the downside in coming periods, although the broker expects the recession in Australia will be less severe than in other developed countries.
The positives of the Q4 GDP report, according to UBS, are that Australian households are repairing their balance sheets as evidenced by the savings ratio being around a 20-year high at 8.5% presently. As well the stocks to sales ratio fell to a record low and this implies no major inventory overhang. Despite this the broker expects growth to remain negative through the first half of 2009 given the weakness in other areas of the economy.
The data lead GSJB Were to suggest the Reserve Bank of Australia’s (RBA) growth forecasts are now not achievable and this implies additional policy measures in coming months. In its view this means additional rate cuts, with the broker now expecting the official cash rate to drop by 50-basis points in the near-term and a further 50-basis points in cuts in the second half of 2009.
In the view of Deutsche Bank the RBA is likely to look at next week’s employment data before finalising its decision on rates for the April meeting, with a weak number adding weight to the potential for a cut of 0.50% at that time. Otherwise the broker expects additional cuts in coming months but of 0.25% each time and not necessarily at every meeting.
ABN Amro sees official interest rates as headed to 2.0% following yesterday’s data while pointing out the move by the RBA to keep rates steady at its meeting earlier this week was likely one of keeping something up its sleeve in terms of having the flexibility to move again on rates when there is mounting pressure from factors such as rising unemployment.
The GDP data likely bring this timetable forward in the broker’s view and it is now expecting a 0.5% reduction in the cash rate next month. UBS also sees rates coming down further and agrees with ABN Amro that a level of 2.0% is likely by mid-year.