Australia | Mar 06 2009
By Andrew Nelson
Following on from yesterday’s article (Oz Interest Rates Will Continue To Fall, Say Economists), where FNArena reported TD Securities is expecting a rate cut next month and expects the bottom of the cycle will be 2%, the global broker has updated its view. The good news is TD still maintains its final end point, thus leaving the FNArena Snap Shot Consensus intact, but the team is now calling for an accelerated run of easing in the months ahead as Australia catches up with the US in the Recession Race.
TD Securities Global Strategist Stephen Koukoulas points out that for almost a year, he and his colleagues have been warning about a recession in Australia. For more than three months he has been looking for the recession to be at least as severe as the one unfolding in the US. Koukoulas notes recent developments have done nothing to improve this outlook.
He believes that Australia’s recession is now as bad as the recession in the US and warns it could become even worse. Koukoulas has provided the below chart, updated with the benefit of the recent data avalanche. Of specific note is the Q4 national accounts, which Koukoulas says more than demonstrates the recession in several different forms.
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His grim assessment is that the data now all too clearly show the depths of Australia’s recession and the legitimacy of comparisons with the US.
The stand out feature of these results, notes Koukoulas, is the fact that GDP in the December quarter 2008 was 0.2% lower than in the March quarter 2008, which means GDP has now on average fallen 0.1% per quarter for three straight quarters. He points out that in per capita terms, the fall in GDP has been greater, simply because Australia has such strong population growth.
This means GDP per capita has fallen 1.4% over three quarters, which translates to a decline of 0.5% per quarter for three straight quarters. Certainly not an admirable or confidence inspiring trend.
Over the same period, US per capita GDP fell 1.7%, which is only a fraction weaker than the performance of Australia. And this, says Koukoulas, is before the terms of trade collapse hit the Australian economy and helped the US.
Meanwhile, the collapse in commodity prices is good for the US and bad for Australia and this is just starting to show in the already ominous Q4 terms of trade data. With commodity prices still weakening, the terms of trade trends will actually help US GDP, while at a time hurting Australian GDP.
On top of that, a plummeting level of business confidence points to more falls in Australian GDP, while business surveys and the collapse of the Chinese economy also spells doom for Australian GDP, says Koukoulas. Finally, the construction sector is in dire straights, with both housing and non-residential building still rummaging through the tip.
Given it is also clear to Koukoulas that the unemployment rate will continue to move higher, he thinks that Australians should feel little guilt in being worried, very worried. The recession (and yes, it is certainly a recession according to Koukoulas) has a lot further to run and it will most certainly get worse before we can even begin to hope it will get better.
TD Securities is now expecting 25bp rate cuts for the next three months, bringing the official cash rate down to 2.25% in June, with another 25bp to be trimmed off some time in Q3.
