Australia’s Is Fighting Recession (Update)

For the first time in eight years, Australia’s economy unexpectedly shrank in the fourth quarter of 2008. Could Australia fallow other major economies and deepen into recession or is it just temporary deterioration in economic activity?

At Trading Economics, we think that Australia’s downturn is in line with the other major economies but is more moderate. In fact, the GDP contraction in the last quarter was smaller than in other countries. Moreover, Australia still has a functioning banking system able to transmit cuts to lower mortgage and business borrowing rates. Looking further, the 400 basis point reduction in interest rates seems to bring positive effects. Companies’ capital investment rose by 6 per cent in the fourth quarter and new home sales climbed 8 per cent. In addition, a fiscal stimulus of A$42 billion in aid for families, pensioners, bond markets, home buyers, and extra spending on schools and roads should moderate the slowdown. Indeed, retail sales were slightly up in January, helped by government handouts and the real household disposable income rose almost 10%.

However, there are main reasons to be concerned. Exports which have been the main driver of Australia's growth in the last few years are deteriorating month by month since lower commodity prices and slowing global demand are no longer offset by a the weakening currency. In addition, Australia’s jobless rate rose to 4.8 percent in January, the highest in almost three years, as mining companies, airlines, and automakers fired full-time workers.

Anna Fedec,
3/8/2009 9:39:19 AM