Recession, recovery or both?

Australia has so far had a very mild economic downturn compared to other countries and its own history. However, it is likely that the economy went backwards in the June quarter and that this will continue into the current quarter. This, along with falling inflation and rising unemployment, is likely to prompt more interest rate cuts over the next six months.

Later this year and through 2010 a sustained recovery is likely to kick in driven by the rebound in China, a recovery in housing construction and rising public investment. In the meantime, economic indicators are likely to be a mixed bag. 

How does this recession compare?

While the global economy is going through its worst recession in over 70 years, the Australian economy has held up remarkably well, so far at least. The following table compares the current downturn to past recessions.

What happened in past Australian recessions?

Recent data has painted a confused picture

Recent economic data has been somewhat confusing. March quarter GDP surprisingly rose, housing finance and auction clearance rates have increased, consumer and business confidence readings are well off their lows, retail sales are up 7% year-on-year (yoy) and car sales look like they may have bottomed.

However, business investment appears very weak, the trade balance is deteriorating again, building approvals have fallen back and unemployment is still rising. There is also a concern that monetary and fiscal stimulus is the only reason for the positives, and that it will soon fade. So where are we?

Expect things to get worse in the short-term…

There are several reasons to expect economic conditions, as measured by GDP, to contract in the short-term:

• Exports now appear to be weakening. Rural and gold exports, which supported a surprise rise in March quarter export volumes, are reversing and some of the fall in Asian manufactured exports will likely flow through to Australia;
• The slump in export prices and the flow through to national income is just getting underway, with prices for coal and iron ore coming down by 30% to 60%;
• Business investment looks set to fall further on the back of a slump in profits, low levels of capacity utilisation and the tougher credit environment (with business credit now going backwards). The weakness in business investment is highlighted by a 61% fall in the value of non-residential construction approvals from year ago levels; and
• While households are currently being supported by the Government’s cash payments, July tax cuts and low interest rates, this will be offset in the short-term by uncertainty about the labour market, as unemployment continues to increase, and the desire to reduce debt in the face of the 15% or so loss of wealth.

For these reasons GDP is likely to fall in the June and September quarters. Our leading indicator for the Australian economy suggests more weakness in the short-term before growth resumes later this year and into 2010.

Leading indicator suggests contraction then recovery