Melbourne Businesses See Tough Times Ahead

UNCLAS SECTION 01 OF 02 MELBOURNE 000123

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON CH AS
SUBJECT: Melbourne Businesses See Tough Times Ahead

REF: Canberra 1036

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Summary
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1. (SBU) Melbourne business leaders predict that Australian GDP
growth will slow to approximately two percent in the coming three
quarters. While most are not using the word recession, there is an
expectation that jobs will be lost, commodity prices will fall and
belts will have to be tightened. The jury is still out on how
effective PM Rudd's recent financial rescue plan will be (reftel),
and analysts are similarly divided on how hard a landing commodities
will have. With Australians concerned about slowing global growth,
the slowing domestic economy, the plummeting value of their
retirement funds and the possibility of protectionist policies
springing up in the United States the global financial crisis
certainly appears to have hit home in Melbourne. End Summary.

The "R" Word
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2. (SBU) During a series of meetings with Melbourne business leaders
and analysts on October 22, most contacts told visiting Econcouns
that they expect Australian GDP growth to slow to approximately two
percent in late 2008 and early 2009 but do not anticipate a
recession. Only Goldman Sachs/JB Were Chief Economist Tim Toohey
stated that his firm expects a recession in Australia. Toohey
attributed this to "dramatic wealth destruction, debilitating
tightness in money markets, rapidly slowing credit growth, sharp
falls in commodity prices and the increasing probability that
Australian house prices are now in decline."


3. (SBU) National Australia Bank's (NAB) Head of International
Economics, Tom Taylor forecast a "grim" outlook for early 2009 due
to a loss of confidence in global financial markets. In addition to
supply problems with obtaining credit, Taylor noted that "deposits
are pouring in," indicating that NAB customers are taking a more
defensive stance and are becoming more adverse to seeking credit.
Victoria's Secretary of the Treasury, Grant Hehir indicated that he
expected Victoria's jobless rates to increase to five percent.
According to Hehir, there has been an "enormous drop off" in tax
revenue particularly in conveyances and housing. During the Asian
Financial Crisis, Australia was able to export to the United States
and in the aftermath of the dot com bubble, Australia looked to
Asia; now "there is nowhere to go."


4. (SBU) Tony Pensabene of the Australian Industry Group (AIG)
described a general slowing of the economy except in the commodities
and infrastructure sectors. Most of AIG's members, Pensabene said,
say that things are getting "tough." While some members complain of
year-on-year losses of up to 16 percent, AIG believes that the
Australian economy will continue to grow, albeit at a reduced clip.
Analysts at AIG, NAB and Goldman Sachs/JB Were agreed, however, that
trouble in the global financial sector has begun to spill over into
the "real" Australian economy.

Reaction to Rudd's "Rescue Plan"
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5. (SBU) Both Toohey and Taylor stated that Prime Minister Rudd's
financial "rescue" package would likely be too little, too late.
According to Toohey, "the lags between policy implementation and the
impact upon the real economy will likely be too late to avoid a
shallow recession and draw an end to Australia's record 17 year
economic expansion." Expressing a similar sentiment, Tom Taylor
said that Rudd's package would not be enough to avert a turbulent
first quarter in 2009 and said that quick spending on infrastructure
would not be sufficient to reverse impending job losses. Taylor
believes that the benefits of the plan will be exhausted by
Christmas.

Boom, Bust?
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6. (SBU) Melbourne observers maintain different expectations about
the future of Australia's commodities sector. NAB Economist Tom
Taylor believes that Australia's economy is historically driven by
strong foreign investment as well as a robust export market. Citing
a series of similar downturns in the late 19th and early 20th
centuries, Taylor believes that there is no "soft landing" in store
for Australia's commodities market. Goldman Sachs/JB Were
economists take a different stance and believe that rates of growth
in China will be "modestly" slower in 2008/2009, but that China will
continue to drive rising global raw materials demand. Goldman
analysts say that the slowdown in Chinese construction will be "very

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localized and will predominantly affect Shanghai and a few other
East Coast cities." Victoria's Secretary of the Treasury said that
commodity prices have fallen in Australia, but the impact on
Victoria will be less pronounced than in the resource rich states of
South and West Australia.

Fear of U.S. Protectionism
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7. (SBU) Australians from all quarters are expressing fear of
increased U.S. trade barriers. Many believe that in addition to
heightened regulatory pressure on financial institutions, Americans
will retreat to a more protectionist trade stance. Victorians are
concerned that a strong protectionist stance by the United States
will encourage similar closed doors among other global economies.
Econcouns emphasized that revived trade barriers are not part of the
U.S. response to the global financial crisis.

Comment
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8. (SBU) While there is no consensus on where the Australian economy
is heading, most expect a period of slower growth. This slowdown,
arguably unlike previous ones, has had a significant psychological
impact on many Australians due to mandatory superannuation
(retirement fund) contributions and the perception that "vast"
amounts of wealth have disappeared. Although it may still be too
soon to tell exactly how the global financial crisis will affect
Australia, very few believe that they will remain immune from the
international economic malaise. Most contacts still believe that
Australia will fare better than other Western economies, but are
wondering to what extent the crisis will impact their lives.

THURSTON