High risk of recession despite rate cuts and cash injection

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The Wild Economic Ride is far from overEconomists say there’s a 40 per cent chance the economy will end up in recession, despite recent big interest rate cuts and the government’s massive $10 billion cash injection.

The annual survey by Australian Business Economists (ABE) released on Tuesday also forecast the Reserve Bank of Australia’s (RBA) cash rate falling to 3.5 per cent in 2009, from 4.25 per cent.

But this will not stop unemployment rising to 6.4 per cent by 2010 from 4.5 per cent by the end of this year.

These daunting predictions came as a new business survey showed both trading conditions and confidence had slumped further in November.

Against this gloomy backdrop, Treasurer Wayne Swan continued his hard-sell of the government’s $10.4 billion economic stimulus package.

One-off payments to millions of pensioners, carers and low-income families totalling $8.7 billion started being rolled out on Monday.

“This strategy is absolutely essential, given the scope and the size of the global financial crisis and its impact on this country,” Mr Swan told Fairfax Radio Network.

“What we want to do with this strategy is to support people out there who will spend responsibly and in so doing they’ll be supporting Australian jobs.”

But Opposition Leader Malcolm Turnbull said most Australians would find the government’s message to “spend, spend, spend rather jarring”.

“I think most Australians would find that a rather difficult message to comprehend given these economic challenges we face,” Mr Turnbull told a conference in Melbourne.

The ABE said there were upside risks to their 2009 economic growth forecast of just one per cent from the substantial amount of both fiscal and monetary policy stimulus.

“(But) even if the economy failed to pass the technical definition of recession, for many households and businesses the current economic downturn would very much feel like recession,” it said.

A recession is technically two quarters of negative growth.

RBA governor Glenn Stevens is due to address the ABE Annual Dinner at 8.25pm (AEDT) on Tuesday.

The latest National Australia Bank monthly business survey shows business conditions have tumbled to their lowest level since 1992.

Business confidence has also weakened further to its lowest level since it was first monitored in 1997.

NAB chief economist Alan Oster said the results of the November survey made for “grim reading”.

“What is particularly concerning is the speed of the deterioration in recent times,” Mr Oster said.

“Nor does it appear that the deterioration has bottomed.”

He said declining forward orders and investment intentions, coupled with a sharp slowing in retail spending and rising jobless figures, meant the RBA would have to continue to rapidly lower interest rates.

The RBA has already slashed the official cash rate by 300 basis points in the past four months.

The survey’s measure of business conditions dropped six index points to minus-17 points in November, while business confidence fell one index point to minus-30 points.

Given the grim business outlook, NAB is forecasting Australian gross domestic product growth to slow to a mere 0.5 per cent in 2009 and 1.75 per cent in 2010.

“That is clearly a recession – albeit a relatively mild one,” Mr Oster said.

AAP

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