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GDP analysis with Chris Richardson -

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GDP analysis with Chris Richardson

Broadcast: 04/03/2009

Reporter: Leigh Sales

Access Economics' Chris Richardson joins Lateline to discuss today's GDP figures and to share his
thoughts as to what might lie ahead for the Australian economy.

Transcript

LEIGH SALES, PRESENTER: Some economists believe Australia's already in recession, even if the
numbers don't quite put us technically there yet.

To assess today's GDP figures and to speculate about what might lay ahead for the Australian
economy, Chris Richardson from Access Economics joined me earlier from Canberra.

Chris Richardson, if this quarter has been worse than expected, what do you expect the next
quarter's figures to show?

CHRIS RICHARDSON, ACCESS ECONOMICS: I'm afraid that Australia's economy will shrink again next
quarter. What has been happening internationally is getting worse.

And that will continue to weigh on Australia's economy. Recession is infectious and it's sweeping
the world and Australia is not immune to that.

LEIGH SALES: And you believe we already are in recession even if we're not technically so?

CHRIS RICHARDSON: Yes, it's simply too much by way of head winds for Australia to be able to avoid
recession.

Unemployment is already rising fast, corporate profits are falling fast, growth has fallen away
from very good to negative territory.

It's still true that Australia is one of the strongest growing rich nations in the world. It's just
that the world itself is now in so much trouble.

LEIGH SALES: How did the Treasury, even with its most recent downgrading of expectation, get it so
wrong?

CHRIS RICHARDSON: Look, every forecaster around the world, official ones in Australia and in a
number of nations, private sector, we are all revising down our forecasts every day.

And the reason is the global banking system broke last September; it's that simple. As a result
economies are getting in more and more trouble very fast.

LEIGH SALES: We've got the G20 coming up and it will focus quite heavily on this issue of bank
solvency. How does that issue affect Australia?

CHRIS RICHARDSON: It's become more of a problem just in the last two weeks alone. Increasingly
clear that a number of US banks just aren't lending; they're effectively insolvent.

And to get over that, to start money flowing again, which is what we need to have any chance of
stopping the slowdown in the world economy at the moment, we need to have banks in the US
nationalised for a while.

It can be just temporary, but it needs to happen. The trouble is that it's harder to get
nationalisation in the US than anywhere else.

It means we and the world now have to wait while the American political process gets in gear and
nationalises some key banks.

LEIGH SALES: You talk about nationalisation but Kevin Rudd was quoted today as saying that
non-viable banks should be allowed to fail. Do you see that as an option?

CHRIS RICHARDSON: Certainly some of them will have to fail. Equally, somebody has to be lending
money.

The old saying says money makes the world go around, but that's not happening at the moment because
the globe lacks a well functioning banking system. And until we can break that log jam, sure, some
banks have to be allowed to fail. Others will have to be nationalised to get money moving again.

LEIGH SALES: Back to the forecasts. Treasury's current forecast for unemployment is seven per cent.
Given the figures we've seen today and what's going on around the world, do you believe that figure
is still realistic?

CHRIS RICHARDSON: I think it is too low. Access Economics has been saying 7.5 per cent for a while.
We're gist redoing our forecasts now.

I expect, sadly, that we'll be raising our unemployment forecast. The pace at which jobs are
getting lost around the world is very, very fast.

Australia's still doing great and has the wonderful advantage of a strong banking system and the
fact that we hit these troubles with momentum.

The economy was growing well, a big backlog of construction projects to be done, rapid population
growth; all those things help us but, yes, unemployment will be rising fast here too.

LEIGH SALES: There's obviously a lag in economic figures. What are you hearing anecdotally of
what's going on right now in the economy in jobs and the hours people are working and spending.

CHRIS RICHARDSON: It is getting worse and you're seeing it first in company profits. Clearly...
although the data out today showed that they fell noticeably in 2008, clearly they are worsening
fast.

And more and more and more companies are starting to look at can they keep their workers on. You
will see more job losses announced in the coming weeks.

ALI MOORE: Putting political spin aside, is there any way of gauging whether or not the Rudd
Government's stimulus package has been successful?

CHRIS RICHARDSON: You can't say for sure. Today's data would seem to suggest that more than half of
it was saved. Equally, we know that the spending from that money continuing into January.

We will never have two Australia's, one where there was a stimulus package and one where there
wasn't. So nobody can ever solve the argument. I am happy that we had the stimulus package.

LEIGH SALES: What about going forward? Are there any key barometers we should be look out for as
the coming months unfold in terms of trying to gauge the Rudd Government's management?

CHRIS RICHARDSON: I think there are things you can look for in Australia and around the world. You
can look at the cost of money to companies and to families around the world.

That will be a sign that banks systems are starting to free up if... not the interest rates charged
by central Banks like the Reserve Bank, but the actual interest rates charged by banks. If they're
coming down, that will be good news.

So too will measures of confidence turning around. And you will see indicators of that indirectly
in share markets, in commodity markets.

For Australia there is nothing more important than the spot steel price and housing prices because
Australia has one big unexploded bomb; that is our housing prices.

I want to see an end to falling housing prices here before I'm happy that we've turned the tide.

LEIGH SALES: You say it's an unexploded bomb. Do you think it's going to explode?

LEIGH SALES: I don't because we have the good fortune to have rapid population growth, very low
interest rates and next to no rental vacancies.

Remember, in the likes of the US they had many new houses that are just sitting there empty.
Australia doesn't have that same combination.

It means we have strong cyclical support to our housing prices, even if they are quite high in
world terms.

LEIGH SALES: Given today's figures plus yesterday's decision by the Reserve Bank to hold interest
rates, what are the prospects for an interest rate cut next month?

CHRIS RICHARDSON: I do think rates will be cut more in coming months, probably next month. We've
been saying for a while that the Reserve Bank's cash rate, currently 3.25 per cent, would end up at
2.5 per cent.

But a better way to say it is it will end up where it needs to end up. The tougher the global
conditions get, the lower the Reserve Bank will be setting its rates.

LEIGH SALES: Chris Richardson from Access Economics thanks for being with us tonight.

CHRIS RICHARDSON: Thanks Leigh.