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Australia avoids recession -

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Australia avoids recession

The World Today - Wednesday, 3 June , 2009 12:10:00

Reporter: Stephen Long

PETER CAVE: First though to the economy and the shock news that Australia has avoided a recession,
at least for now.

Defying market expectations, the economy grew in the March quarter, and then some.

In the first three months, output expanded by 0.4 of a per cent. And over the past 12 months, the
economy also grew by the same margin. It's a performance that ranks at the top of the Western

But is it a sign that Australia has turned the corner or is there worse to come?

Joining me to analyse the result is economics correspondent Stephen Long.

Stephen, what happened to that recession?

STEPHEN LONG: Well clearly Peter it was the recession we almost had to have, to paraphrase Paul
Keating. Perhaps it will be the recession we never have to have, on the basis at least of the
technical definition of two consecutive quarters of negative growth.

But all that really tells you is that that is quite an arbitrary and in some ways silly measure.
Because these results, this GDP number, actually points to an economy that is quite sick, not an
economy that is healthy as the headline number of a rise of 0.4 per cent in the month would imply.

PETER CAVE: Why isn't it a sign that the economy is travelling well?

STEPHEN LONG: Peter it's because of the components that contributed to the positive figure. The
main contribution was actually a collapse in imports; that added 1.6 per cent to GDP. There was a
small rise in exports adding 0.6 per cent, and household consumption added a little too.

But basically the main reason we didn't have a recession was because imports fell off a cliff, as
business brought in less capital equipment and people consumed less from overseas, but mainly the
business, business imports side of things.

And that tells you that companies are not investing and business investment cut 1.1 per cent off
economic growth. If it hadn't been for those import-export numbers, it's highly likely we would
have seen a recession.

And why are imports falling? It's actually because the economy is in a bad way and business is
pulling back.

PETER CAVE: What role, if any, did the Government's stimulus package have?

STEPHEN LONG: Well it did play a role, that's pretty clear from the numbers because there has been
an increase in household consumption; that added about 0.5 per cent to economic growth.

So the Government stimulus payments got people consuming and the housing side of things helped a
bit too.

So, it has had a positive contribution. The question is how long can you keep on contributing in
that way? We know of course that the Government investment in bricks and mortar, in buildings, in
roads, infrastructure and the like is coming down the track and that may lead to more positive

But yes, you can say, without really going to the merits or otherwise of whether it was a good
policy, that it has had the effect of making a positive contribution to economic growth.

PETER CAVE: You have been saying the economy is by no means out of the woods. Where does it go from
here and what are the dangers?

STEPHEN LONG: Well look, it's very, very hard to say because really the Australian economy is to
some extent captive to events overseas. If we get a relatively quick recovery in the United States,
in Europe and in particular in China where there have been some positive signs, then Australia may
really come out of this without going into a technical recession at all because the demand from
China for commodities could start boosting national income again.

On the other hand, if we have further falls in the terms of trade, cutting national income, things
could get bad, we could see that recession.

But whatever happens from here on, because business investment has been falling so much, we're
going to see less job creation - that's clear from all the forward indicators - and the
unemployment rate will rise significantly.

And I think that most people will feel as if we're in a recession even on a highly technical
definition it doesn't appear that we are.

PETER CAVE: How did the individual states fair?

STEPHEN LONG: Well this is one of the interesting things as well. If you look at the individual
states, we only have a proxy measure - State Final Demand - which tells you what's going in within
each state, it doesn't tell you what's happening with interstate trade.

But if you look at that, every state except for South Australia actually went backwards, saw growth
fall, and every state, bar New South Wales and also if we turn to the territories the ACT, actually
cut from economic growth, South Australia added some as well but just about every other state or
territory detracted from economic growth. New South Wales stood still if we look at the
contribution to the overall economic growth in the national economy.

But on a state by state basis, the only economy, state economy that didn't go backwards was South
Australia. And so that tells you that we're still seeing a pretty rough time and that adds to the
view that we will see, we will see unemployment rise.

But you have to say that this is very, very good news for the Federal Government, because the
headlines do matter, and the slight of having fallen into recession even judging it in a highly
technical way has been avoided, the Rudd Government must be very, very happy.

PETER CAVE: Well thank you Stephen Long.