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Chris Richardson on the latest business outlo -

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Chris Richardson on the latest business outlook from Access Economics

Broadcast: 28/04/2009

Reporter: Kerry O'Brien

Kerry O'Brien speaks with Chris Richardson from Access Economics following the release of the
organisation's business outlook for March 2009.


KERRY O'BRIEN, PRESENTER: As the clock ticks down to the Rudd Government's second Budget, just two
weeks from today, there's another forecast that unemployment in Australia will go close to the
million mark by late next year and that Wayne Swan's Budget deficit for next financial year could
easily peak beyond $50 billion. The Canberra-based Access Economics has today released its latest
business outlook for Australia, and veteran economic forecaster Chris Richardson is suggesting the
nation's recession will be small compared to the rest of the developed world, but also suggests
Reserve Bank interest rates could drop by another full percentage point, with house prices dropping
slightly this year before stabilising.

I recorded this interview with Chris Richardson from Canberra earlier this evening.

Chris Richardson, let's start with the good news, as you see it. You think there are good reasons
for optimism that Australia will have a small recession compared to most of the developed world.
Even though you're tipping unemployment here to reach nearly a million at 8.5 per cent towards the
end of next year, why the optimism?

CHRIS RICHARDSON, ACCESS ECONOMICS: We do have a bunch of advantages; our banks are very healthy
and that's particularly important. Helps also that we've had an enormous stomp on the accelerator,
interest rates, the Federal Government's stimulus packages. The authorities, whether you're talking
the Reserve Bank or government, have never stomped on the accelerator to the same extent.
Population growth is great. Helps that our housing markets are relatively tight - there aren't many
vacancies there, and construction of the big resource projects that might be about to weaken
markedly, but we still have some strength left in the tank there.

KERRY O'BRIEN: How strongly are you of the view that the Reserve Bank will be pressed to drop
interest rates by another 1 per cent or so to around that 2 per cent mark, and secondly, that there
is a prospect of the Australian dollar devaluing further?

CHRIS RICHARDSON: I think the key is the global banking system. The likes of the IMF make the point
that this started last September when the global banking system broke, and until that system is
fixed again, until we get something like the US bailout plan working for their banks, or Western
Europe's banks getting better, you will see most of the major economies of the world in trouble,
and therefore Australia in trouble too.

KERRY O'BRIEN: Well on that - and I'll come back to Australia in a moment, but on that global
outlook, two things: one, you say that it looks like continuing bad news particularly out of the
United States, not just to the end of this year, but through 2010, instead of that being a recovery
year; and second, you're of the view that until America and European countries bite the bullet and
nationalise those troubled banks, at least temporarily, the banking system is not going to come
back to health.

CHRIS RICHARDSON: And that's a real problem because money makes the world go around, and if the
banking system is not healthy, if banks aren't lending, then you won't see economic recovery. At
the moment, banks aren't lending, and we're not convinced that the US bank bailout plan is the
fastest or most effective way to do it. They're concentrating on the bad assets, they need to
concentrate on the bankrupt banks. And people forget that Western Europe banks are in even more
trouble than the US banks. So it's not just down to will that bank bailout plan in the US work. If
both elements linger; if the banks in the US and Europe remain in trouble, then it's hard to see
the global economy strengthening anytime too soon.

KERRY O'BRIEN: Do you think that nationalisation will be forced on governments, inevitably?

CHRIS RICHARDSON: I think it will - you'll see politicians kicking and screaming. The reason
they're not doing it - the reason, for example, the US is structuring the bailout plan and the way
it is, they're trying to avoid nationalisation because it's a political tar baby. Oppositions all
over the world will delight in governments having to nationalise. That's what's slowing us down;
the economics are clear, the politics are dire.

KERRY O'BRIEN: Coming back to Australia, what's your view on what the housing market is likely to
do in Australia over the next two years or so?

CHRIS RICHARDSON: I do think our housing prices are overvalued, and they represent a risk. If you
saw house price falls here in the same way that you've seen them in the US or UK, we would have a
big recession. Equally, we don't expect that; population growth is simply too good, rental
vacancies are too tight, interest rates are too low. And, yes, the Federal Government will be
re-jigging the first home owners grant. We don't expect them to pull it completely; something will
be in place providing support for the bottom end. That combination should see housing prices fall a
bit this year and go nowhere for a year or two after that. That's no fun, but it's the safe way out
of the overvaluation we have at the moment.

KERRY O'BRIEN: Wayne Swan will unveil his second Budget in two weeks from today. What size deficits
do you expect the Budget to show in the next couple of years?

CHRIS RICHARDSON: Next year's deficit is, to a large extent, a matter of choice. The economy's
worsened; that means that the Government will be starting with something well over $40 billion
before it makes its decisions. But it will want and should want to spend more despite that. So
you'll probably see a deficit of over $50 billion, because in the short term, the economy needs
support. Families will be spending less, businesses will be spending less, most people want to save
more; unless governments spend more, we get a bigger recession. The difficulty for the Government
is it' got to explain in the one Budget why it needs to spend more in the short term to support the
economy, but spend less in the longer term to repair the budget. And that'll be - you know, I'm not
that fussed over how big the deficit will be next year, it's where they head thereafter, and how
much courage they show in repairing the gap.

KERRY O'BRIEN: Well, you're saying - after these next two rounds of tax cuts, you're saying don't
expect any more tax cuts for a decade. You're also challenging the Government that the only way,
really, that they'll get back to effectively to surplus is by tackling middle class welfare. And I
would suggest to you that no political leader is going to have the courage to do that, because by
doing so they seriously risk an immediate election loss.

CHRIS RICHARDSON: And, Kerry, I fear you're right. The main risk for Australia is that we ignore
this problem until after the next election - that both sides of politics pretend it's not there.
Our trouble is that the budget is in real trouble, and both sides of politics went to the last
election promising unsustainable, unaffordable policies off the back of boom-time revenues, and the
boom is now well and truly gone. Somebody, some politician has to level with the Australian public
and say, "It's just not affordable." In recent days, the Prime Minister's talked of policies that
could help pay for the pension increase that is expected in the Budget. Now that's fine, yes, you
can tax the rich more, but you're going to eat the rich without closing the size of the budget task
ahead of the Government. They need to hack into middle class welfare; they need to hack into
industry welfare; they can't rule out big departments like Defence and say, "It won't have cuts."
It's a big task.

KERRY O'BRIEN: Coming back very quickly to the here and now with the recession, can I get a quick
snapshot of how you expect the recession to impact on each individual state? NSW?

CHRIS RICHARDSON: Was already in trouble. Is the centre of the national finance sector. In the
biggest recession in Australia at the moment. Will eventually recover strongly, but not yet.

KERRY O'BRIEN: Next year?

CHRIS RICHARDSON: No. More the year after.

KERRY O'BRIEN: Victoria?

CHRIS RICHARDSON: Will have a recession; not as big as NSW, and has done surprisingly well in
recent years. But just has too many eggs in the wrong basket, if you like. You know, its
manufacturers hard hit, its property and business services hard hit. It can't avoid it.

KERRY O'BRIEN: Queensland?

CHRIS RICHARDSON: Queensland and Western Australia, the resource twins, have been doing
magnificently off the back of the China boom. They have a lot of momentum. And Queensland might
even avoid a recession, but it's got to slow a lot. Western Australia will slow even more, but
because it had so much in the pipeline, it's probably 18 months away before it hits bottom.

KERRY O'BRIEN: South Australia?

CHRIS RICHARDSON: Didn't have much of a boom, so it won't have much of a bust.

KERRY O'BRIEN: (Laughs). I don't know whether that's good news or bad news. Tasmania?

CHRIS RICHARDSON: Similar story. Tasmania also has done well in recent years. If population growth
can keep up, then it'll get through with fewer problems than the other states.

KERRY O'BRIEN: Chris Richardson, thanks for talking with us.