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Stephen Long discusses the RBA's economic for -

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Stephen Long discusses the RBA's economic forecast

Broadcast: 06/02/2009

Reporter: Stephen Long

Economics correspondent Stephen Long joins Lateline to discuss the Reserve Bank's forecast for the
Australian economy; it now expects barely any growth at all this year. But it is putting its faith
in the combination of huge rate cuts and a massive Government stimulus to keep recession at bay.

Transcript

LEIGH SALES, PRESENTER: The Reserve Bank today slashed its forecasts for the Australian economy. It
now expects barely any growth at all this year, but it's putting its faith in the combination of
huge rate cuts and a massive Government stimulus to keep recession at bay.

Joining me to discuss this is economics correspondent Stephen Long. Stephen, welcome back.

STEPHEN LONG, ECONOMICS CORRESPONDENT: Thanks, Leigh.

LEIGH SALES: So how steep is the cut to the growth forecast?

STEPHEN LONG: Well the growth forecasts have gone off a cliff just as growth around the world has
gone off the cliff. In the last three months of last year, the top seven economies in the world
suffered the biggest fall in growth ever recorded. And, naturally enough, that's hit Australia so
the Reserve Bank has gone from forecasting nearly two per cent growth in the year to the middle of
2009, the fiscal year, down to just a quarter of a per cent. And, Leigh, in the non-farm economy,
which is where of course most of us live and work, they're looking at zero growth - no growth at
all, the economy just standing still. And that factors in this massive $42 billion stimulus
package. They've put that in in making those calculations.

LEIGH SALES: So, the big question: is there faith in this stimulus package justified?

STEPHEN LONG: It's a lot of money and it obviously will contribute positively to economic growth.
But here's the rub and here's my suspicion: look at the $12.7 billion in handouts to individuals
and families. Well, given that we have had the biggest credit bubble in the history of the world
and Australians have binged on debt as people did overseas, and now they've stared into the abyss
with this slow-moving train wreck around the world and looming recession, won't a lot of people use
that money to pay down debt and to increase their savings rather than spending it on consumer goods
that really aren't going to do them a whole lot of good in terms of making more money or wealth?
That is what I think is highly likely. And there's a few stats to put that in context. If you look
at the last recession and the level of debt to disposable income, it was a fraction of what it is
now. The level of debt to disposable income is more than three times as high as it was during the
last recession. And even after the huge rate cuts we saw last year, you still have a situation
where Australians, on average, are making interest payments that take up more than twice the level
of income than they did during the last recession - 15 per cent. So, I reckon a lot of people will
actually use this money to pay down debt rather than spending it, which will put a big knock in the
growth.

LEIGH SALES: There's a big incentive to do so given, you know, the figures that you outline there.
When Kevin Rudd announced his stimulus package this week, he said that six out of 10 of Australia's
major trading partners are in recession. What's the practical effect of that?

STEPHEN LONG: Well, it's a huge hit to Australia's exports and our national income. There has been
an unprecedented fall in industrial output and trade in east Asia. In Japan, one of Australia's
biggest trading partners, if not the biggest, you have a situation where output is at 1985 levels.
And so, that's going to hit Australia very, very hard, Leigh.

LEIGH SALES: Stephen, thanks very much, we'll see you next week.

STEPHEN LONG: Look forward to it.