Australia‘s economy is headed for recession, according to the Westpac-Melbourne Institute Leading Index, which predicts the likely pace of economic activity three to nine months in the future. The index fell 1.2% in December, and Westpac’s senior economist Matthew Hassan says the result may indicate an Australian recession is still to come.
Sign up for SmartCompany newsletter.
Free to your inbox every weekday
“Australia has experienced three recessions since 1965 – defined as a contraction in economic activity over the course of a year. These were in the mid 1970s, the early 1980s and the early 1990s,” he says.
“Despite some modest upward revisions, the growth rate in the leading index remained in negative territory for the second consecutive month. In the past this has been a useful indication of a likely recession in Australia.”
Hassan says there have only been two instances where the growth rate in the index turned negative, but the economy avoided a recession.
“And even these episodes saw a notable weakening in economic activity, including
a quarterly decline in GDP, a slowdown through the year growth to around 1%, and significant falls in domestic demand in through the year terms.”
Shares drop sharply
The bad economic news weighed heavily on the Australian sharemarket, with the benchmark S&P/ASX200 index down 82.1 points or 2.4% to 3382.2 at 12.25 AESDT. The dollar has also fallen to a two-week low of US63 cents.
Investors nerves were not helped by a dismal night on Wall Street, which fell sharply after grim manufacturing data, and news Japan has fallen deeper into a recession.
The Dow Jones Industrial Average lost 3.04%, taking the market to its lowest point since the start of the year. Oil prices also plummeted 7% to just $US34 a barrel.
US investors were also worried that President Barack Obama’s stimulus bill will not help businesses or banks quickly enough to counter deteriorating economic conditions.
Obama signed the bill into law yesterday, and claims it will help create or save up to 3.5 million jobs. But some economists argue the cash won’t flow quickly enough to save the rising jobless rate of 7.6%, negating any benefits the stimulus may have given the economy.
The $US787 billion bill took weeks of debate to pass the Congress, as both Republicans and Democrats argued over where the bulk of the money should be spent.
Back home, Westpac shares lost 3.1% to $16.26 after announcing cash earnings fell 2% to $1.2 billion in the December quarter. The group also announced $800 million in writedowns.
The bank claimed its total lending gained 2.4% in the three months ending 31 December, as it recorded 9.6% growth in customer deposits. Chief executive Gail Kelly says the bank has performed well after its merger with St George despite a difficult environment.
“While impaired and stressed exposures have increased over the period consistent with the continued deterioration in the operating environment, Westpac’s franchise is in sound shape.
“Westpac is well positioned to continue to support customers through the cycle.”
Meanwhile, retail sales increased 0.3% in the December quarter, according to new Australian Bureau of Statistics data. But the bureau says the data should be interpreted “with caution”, as the Government’s stimulus package last year may well have affected the results.
Food retailing experienced a 1.8% increase, department stores 0.3% and “other retailing” 1.3%. Cafes, restaurants and takeaway food services experienced a 0.6% drop in sales, while clothing and soft goods retailing fell away 0.2%.
More rate cuts
But retailers can look forward to another round of rate cuts this year. Minutes from last month’s Reserve Bank of Australia meeting indicate the bank will move the official cash rate lower, but there is still speculation as to how far it will go.
Westpac’s Hassan says that “we expect it to further reduce rates with the overnight cash rate eventually moving to 2% by mid-2009”.
ANZ economist Katie Dean says the bank’s warnings of deteriorating economic conditions “leaves the door open for the RBA to pursue further (pre-emptive) aggressive rate cuts in the short-term”.