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Mar 10

Economic Outlook

The global financial crisis continues to make front page news as governments around the world continue to announce stimulus packages and companies continue to retrench workers and show large losses or declines in profit results. During the first week of March in the USA the largest ever quarterly loss was announced by AIG at almost AUD$100billion. Equity markets around the world continue their poor run and high levels of volatility are likely to continue whilst the news continues to be poor and credit markets remain weak.

Recent actions by the Australian government include a $42billion stimulus package titled, ‘National Building and Jobs Plan’. Around $30billion is to be spent on infrastructure such as schools, housing, energy efficiency, and roads. Whilst ,these funds will not create immediate stimulus to the economy there is another $12.7billion consisting of tax bonus for working Australians, single income family bonus, farmer’s hardship bonus, and a Back to School Bonus and these payments are expected to be paid during March.

A positive sign for the Australian economy is the Reserve Bank choosing not to reduce the cash rate from its current rate of 3.25%; it is a positive sign as the Reserve Bank is clearly not in a hurry to drop rates. This is the first time in since August it has taken no action and the reason is that the Reserve Bank would like to wait a little longer to assess the impacts of the previous rate cuts before taking further action.

Current government forecasts for key economic indicators include an expectation of unemployment to increase from its current 4.8% to 5.5% by June 2009 and to 7.0% by June 2010. The government’s stimulus package is expected to support up to 90,000 jobs over this period.

The GDP figures released on March 4, showed a contraction in the December quarter of GDP placing Australian very close to a technical recession (i.e. 2 consencutive quarters of negative growth). Government forecasts are that our economy will grow by only 1% in 2008/09 and 0.75% in 2009/10. It is likely these will be revised down given the recent GDP result.

Overall, the Australian economy is slowing and news is not expected to be positive, however, compared to the rest of the world Australia is still far better positioned to cope with this downturn. Our interest rates are higher than overseas developed countries thus providing the Reserve Bank with more available leverage, our banking system is significantly stronger thanks to the strong regulation by APRA, and with our government running budget surpluses for many years, the government is now well positioned to spend money from a strong base.

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