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