Australia Headed for Recession?

UNCLAS SECTION 01 OF 02 CANBERRA 000219 SENSITIVE SIPDIS STATE FOR EAP/ANP TAGS: EFIN ETRD ECON AS SUBJECT: Australia Headed for Recession? REF: CANBERRA 214 ¶1. (U) SUMMARY: The Australian economy experienced its first quarterly negative growth in 8 years in the December quarter. Over 2008, Australian trend GDP grew by only 0.6%, the weakest since 1991, and negative growth in the March quarter will put the economy in technical recession. Treasurer Swan has suggested further stimulus measures could be implemented to counter the threat of recession in Australia. END SUMMARY. ¶2. (U) National accounts figures released March 4 show that Australia appears closer to recession. The economy contracted by 0.1% in the December quarter (0.5% seasonally adjusted). Over the year trend GDP growth was 0.6%, while non-farm GDP decreased by 0.3% (0.8% in seasonally adjusted terms). The growth figure for the September quarter was not revised. The result was a surprise as a positive result was expected by many experts particularly after the Reserve Bank yesterday left the cash rate unchanged (ref A). Recent economic indicators have given mixed signals about the strength of the economy. - Pre-tax company profits slumped 17.8% in the December quarter, their biggest fall since March 1991, while a business survey by the Australian Industry Group showed conditions for manufacturing have got worse since then. On the other hand, retail sales increased by 3.8% in December 2008 and 0.2% in January, defying market expectations of a 0.6% drop. - The slip into negative territory will see the Opposition argue that the Government's two economic stimulus packages, which included billions of dollars of cash handouts, have had little effect in stimulating the economy (although money from the second stimulus package has not been dispensed yet). ¶3. (SBU) In trend terms, Australian GDP decreased by a more modest 0.1% in the December quarter and non-farm GDP fell by 0.3%. This result reveals a stronger Australian economy with growth over 2008 of 0.6%. Some of our contacts argue that there are technical reasons for preferring trend statistics because changes to the structure of the economy over the past five years have called into question the accuracy of the seasonal adjustment methodology. Further, staff shortages at the Australian Bureau of Statistics have cast doubt on the seasonally adjusted series, according to senior Treasury contacts. AUSTRALIA'S EXPORTS AND TERMS OF TRADE WORSEN ¶4. (U) In recent months, seven of Australia's top 10 trading partners including Japan, the US, New Zealand and the UK are already in or close to recession. The Australian Bureau of Agriculture and Resource Economics (ABARE) has forecast that Australian commodities exports will fall by 17% in 2009-10. Exports of energy and minerals in 2009-10 are expected to fall by 34%, driven by lower forecast prices for oil and coal. The terms of trade fell 2.8% in seasonally adjusted terms in the December quarter following a 6.2% increase in the September quarter. In the December quarter, in seasonally adjusted terms, net exports contributed 1.5 percentage points to GDP growth. Notably, the fall in the volume of imports had a significant positive impact on GDP. DIVERSE DRIVERS OF GROWTH ¶5. (U) There are varying results for different sectors of the Australian economy. On the expenditure side, the growth (in seasonally adjusted volume terms) over the past four quarters was driven by machinery and equipment private investment (0.9 percentage points),private non-dwelling construction (contributing 0.8 Qpoints),private non-dwelling construction (contributing 0.8 percentage points) and exports of goods and services (0.8 percentage points). Offsetting the growth over the past four quarters was a rise in imports of goods and services (subtracting 0.6 percentage points). On the production side, the strongest contributing industries to GDP growth (in trend volume terms) over the past four quarters have been property and business services, and construction and Agriculture (all 0.3 percentage points). The biggest detractions have come from manufacturing (-0.2 percentage points) and finance and insurance (-0.3 percentage points). IMPORTANCE OF THE SECOND STIMULUS PACKAGE ¶5. (U) Treasurer Wayne Swan said that the bigger than expected contraction in Australia's economy in the December quarter would have been much worse if the Government had not moved to stimulate the economy. Swan has been forced to defend the two stimulus packages, which contained billions of dollars worth of cash CANBERRA 00000219 002 OF 002 handouts, in the wake of today's grim national accounts. Swan described the figures as sobering, but not surprising, but he refused to speculate whether Australia was closer to a recession. However, Australian households appear to becoming more cautious; with the household saving rate increasing to 6.6% in trend terms and 8.5% in seasonally adjusted terms in the December quarter 2008, the highest since September 1990. This suggests a major part of the stimulus package payments could be saved. ¶6. (SBU) COMMENT: The first negative quarterly GDP result for the Australian economy in eight years came as a surprise to most observers. If the March quarter is negative, then Australia will technically be in recession, despite the impact of the first stimulus package. Further, interest rates have fallen by 400 basis points since September 2008, boosting demand as the Reserve Bank has noted. The outlook is unclear but Australia could still avoid recession. END COMMENT. CLUNE