Australia on the brink of recession after GDP contracts

AUSTRALIA is on the brink of its first recession in almost two decades after the economy shrank in the December quarter.

"It¿s clear to me that Australia is already in recession." NAB economist Rob Henderson. Photo: AAP.

Only the performance of the agriculture sector spared Australia a technical recession, defined as two consecutive quarters of economic contraction.

The figures released by the Australian Bureau of Statistics today showed the non-farm sector of the economy shrunk in both the September and December quarters.

Prime Minister Kevin Rudd gave a strong indication Australia would drift into recession, saying that recent data showed the nation "cannot continue to swim against the global economic tide".

“Australia can reduce the impact, cushion the impact of the global economic tide but we cannot stop it altogether,” Mr Rudd told reporters in Gladstone, Queensland.

Total gross domestic product declined 0.5 per cent in the December quarter, compared with growth of 0.1 per cent in the September quarter. It was the first time the economy had contracted in a quarter in eight years.

The economy grew at an anaemic 0.3 per cent over the year.

The stock market slide to its lowest intraday level in five years and the Australian dollar slumped more than 1 per cent to below US63 cents as investors priced in a greater chance the Reserve Bank will cut interest rates next month. Yesterday, the RBA left rates unchanged.

NAB Capital chief economist Rob Henderson said the “dreadful” GDP figures showed the Australian economy was already in recession, even though there hadn’t been two consecutive quarters of contraction.

“Half a per cent down after 0.1 per cent growth in the previous quarter … is an extended period of weak growth,” said Mr Henderson.

“By the US definition we would have a recession so it’s clear to me that Australia is already in recession.

“I don’t think it will get much better until the fourth quarter.”

A senior Reserve Bank official warned today the Australian economy won't avoid pain in 2009 but it was in better sharp than most other countries.

"Australia came into this period with better momentum than most, and with more scope than most to take expansionary policy measures,” Malcolm Edey, an RBA assistant governor, told a conference before the GDP figures were released.

“That scope is being used.”

UBS chief economist Scott Haslem said he expected the economy to contract further over the next two quarters, despite the massive stimulus from the Rudd Government’s $20 billion in cash handouts and five successive interest rate cuts.

The national accounts figures show household savings soared in the fourth quarter, reaching the highest level since the 1980s, said Mr Haslem.

Household savings rate rose to 8.5 per cent from 3.4 per cent, suggesting 80 per cent of the Rudd Government’s $8.7 billion handout in December had been saved, he said.

“Things are going to get worse on the GDP front. Today’s result will see significant downward revisions to 2009 growth estimates by consensus as the fourth quarter sets the base for 2009,” said Mr Haslem.

Westpac senior economist Anthony Thompson said the rise in household savings showed consumers had banked the extra money from the federal Government and rate cuts.

“While the rate cuts and handouts have improved their position now, they are very worried about the future and their job security,” said Mr Thompson.

Federal Treasurer Wayne Swan said the negative growth had been “inevitable” and was a “sobering reflection of the extremely difficult global environment in which Australia’s economy is operating”.

Before the figures were released, economists had estimated the economy grew by 0.2 per cent from the third quarter, according to the median forecast of 23 economists surveyed by Bloomberg.

Annual economic growth was forecast at 1.2 per cent compared with 1.9 per cent in the September quarter.

Economists had revised their forecasts at least twice in the past few days in the wake of conflicting data on company profits and inventories, trade and retail sales.

On Monday, worse-than-expected company profits and inventories in the fourth quarter sent some economists scrambling for their erasers to change their forecasts to a contraction in GDP.

The next day, these same economists were forced to change their forecasts again after a record $4.1 billion trade surplus in the fourth quarter suggested Australia had managed to grow in the last three months of the year even as its major trading partners moved deeper into recession.

Despite the negative reading, Australia achieved one of the best economic performances in the world in the December quarter.

The US economy shrank by an annual 6.2 per cent, Japan contracted by an annualised 12.7 per cent and the UK fell 1.9 per cent from a year ago.

Only a handful of countries achieved any growth in the fourth quarter, such as India and Greece.

In recent weeks, the RBA has repeatedly highlighted the strength of the Australian economy and banking system compared with the rest of the world, and it was the main reason the central bank yesterday decided to keep interest rates steady at 3.25 per cent.

RBA governor Glenn Stevens said yesterday while economic conditions were clearly weak the recent policy actions taken by itself and the federal Government would support domestic demand in the period ahead.

Before the decision to keep rates steady, the RBA had cut rates by 400 basis points at five successive meetings in the most aggressive easing cycle in Australian history.

Economists said they still expected rates to fall to 2 per cent as early as the middle of the year although the RBA may hold rates steady for the next couple of meetings.