Tuesday, April 21, 2009

Australia In Deep Recession - Central Bank

. Tuesday, April 21, 2009

By stockOzone team

Australia's top central banker on Tuesday conceded for the first time that the country had sunk into its first recession since 1991, despite a raft of interest rate cuts and government handouts.

The blunt statement of fact came after minutes from the Reserve Bank of Australia's (RBA) April 7 policy meeting showed it had already cut forecasts for inflation and growth, predicting a contraction for the first quarter and for 2009 as a whole. "I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy is in recession," Stevens told a gathering of company directors.

Up to now policy makers had steered well clear of the "recession" word but a unrelenting flow of grim data at home and abroad seemed to force a change of tack.

Even Prime Minster Kevin Rudd bowed to the inevitable, saying: "The worst global economic recession in 75 years means it's inevitable that Australia will be dragged into recession."

The usual definition of recession is two successive quarters of contraction. Gross domestic product declined by 0.5 percent in the fourth quarter of 2008 and the RBA now believes it fell again in the first quarter.

The unexpected skid into recession led the central bank to trim rates again at its April meeting, the minutes showed. The quarter-point cut took the key cash rate to a record low of 3.0 percent and brought its easing since September to a huge 425 basis points.

Stevens offered scant guidance on the chance of yet more rate cuts, noting just that past easing, coupled with substantial fiscal stimulus, would be felt for some time yet.

The Labor government has announced spending packages worth over A$52 billion ($36 billion) in recent months and more is expected in its annual budget in May.

All this stimulus had helped Australian households stay relatively less depressed than in many other developed nations, though business investment had taken a harder hit.

Yet, financial markets are betting the central bank will be forced to cut rates to 2.5 percent at least, in large part because unemployment was rising far faster than anyone had expected. The jobless rate jumped by the most in 18 years in March, to reach 5.7 percent.

"My guess remains that falling employment is likely to force the RBA to cut all the way to 2 percent by year's end," said Rory Robertson, interest rate strategist at Macquarie.

"Indeed, Australia's deepening job losses, alongside the modest pass-through of its latest cut, have increased the risk that the RBA ultimately will be forced to cut well below 2 percent," he added.

At least, a marked slowdown in inflation meant there is plenty of scope to ease policy without stoking price pressures. Answering questions after his speech, Stevens said inflation was likely to decline for the next year or two, while the minutes showed the RBA expected greater downward pressure on prices from rising unemployment and plenty of spare economic capacity.

The minutes didn't detail the central bank's new economic forecasts. They said GDP was expected to fall in 2009 before rising again in 2010.

Government data on consumer prices is due on Wednesday and is expected to show annual inflation slowed to 2.8 percent in the first quarter, down sharply from 3.7 percent in the previous quarter and back within the RBA target band of 2 to 3 percent.

"Our view is that weakening near-term domestic economic conditions and rapidly reducing inflation imply several more small fine-tuning cuts in rates over coming months," said Stephen Roberts, an economist at Nomura.

"We still look for a terminal cash rate of 2 percent."

Disclosure: Author does not own any of the stocks discussed here.

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