Tuesday, 9 December 2008

The Recession We Couldn't Avoid

There is no doubt in my mind that the Australian economy is now in recession. Paul Keating once remarked that the 1990's recession was "the recession we had to have", I'm calling this one, the recession we couldn't avoid.

According to the Australian Industry Group, the Manuafacturing sector has been in contraction for 6 months, the services sector for 8 months and the construction industry for 9 months. Yesterday we saw the ANZ job ad series plunge in November. Today the NAB business survey was awful. From the report:

  • Business confidence edges down to a new record low (including the 1990/91 recession).
  • Business conditions sharply down again - to levels last seen in late 1992.
  • Forward orders fall sharply (again) to 1991 lows and capacity utilisation falls significantly.
  • Medium term expectations also sharply lower – including lower capital & hiring plans.
  • Survey implies negative growth in domestic demand and non-farm GDP in Q4 2008.
  • NAB’s measure of credit availability suggests little change in credit availability.
  • Confidence down everywhere – as are conditions, with the exception of mining & transport.
  • Global forecasts for 2009 cut to 1¾% (from 2.4%) with sharply lower growth in USA & Europe.
  • Australian GDP forecasts cut due to the lower start point in Q4 2008 and weaker global growth. We now expect growth in 2009 of only 0.5% - implying recession in the non- farm economy (at least).
  • We also expect more fiscal policy action, weaker labour markets and an even more aggressive RBA. We now forecast the RBA to cut rates to 3% in early 2009 (previously 3¾%).

NAB is a little more realistic than ANZ, NAB is basically calling a recession, at least in the non-farm sector. A 0.5% GDP growth rate next year is probably still too optimistic, but even that implies a couple of quarters of negative growth. NAB has also come down to my forecast for the RBA's cash rate of 3%.

All the myths about the mining sector and our leverage to China's booming economy have been shattered. As is the idea that our financial and property sector is somehow immune. Welcome to the recession we couldn't avoid.