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Australia close to a recession.



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RN PM Australia close to a recession

03/12/2008

MARK COLVIN: If this isn't a recession, it's a very good imitation of one. Australia's overall economy barely grew in the September quarter.

If you take agriculture out of the equation, the economy actually did go backwards. Australia is now relying on government spending and the biggest interest rate cuts in modern times to stop the economy going into retreat.

But whether or not Australia avoids a technical recession, the nation faces a downturn and a sharp rise in the jobless rate.

Economics correspondent Stephen Long.

STEPHEN LONG: It may well be the Clayton's recession - the recession you have when you're not having one.

Rob Henderson from NAB Capital.

ROB HENDERSON: It's perilously close to a negative number but in the end the negative number wasn't recorded and I think if we had seen negative GDP that would have been quite negative for business sentiment and also for consumer confidence so I guess with a sigh of relief we see this number.

STEPHEN LONG: A sigh of relief or resignation? Because although the economy grew, it barely did. In the non-farm economy, where most of us live and work, growth went backwards.

Josh Williamson, from TD Securities.

JOSH WILLIAMSON: The Q308 national accounts was a very, very weak result. Although it only came in point one of a percentage point below expectations that point one per cent growth. All of this was basically accounted for by the growth in farm GDP.

If we exclude the farm sector, GDP actually contracted by point three of a percentage point in the third quarter and this shows the underlying weakness that is confronting the Australian economy right now, given the global slowdown and the credit crunch.

STEPHEN LONG: How much of the economy is in the non-farm sector?

JOSH WILLIAMSON: Most of the economy is actually accounted for by the non-farm sector. Also, you have to remember that the farm sector tends to be very volatile as well.

If we look at just the production side of GDP accounts today, we saw five relatively labour intensive sectors of the economy including finance and business, property services, insurance, wholesale trade, transport and personal services all contract in the third quarter.

Now the fact that these sectors have contracted has serious implications for employment over the next three to six months and does suggest that the economy is headed for a much weaker outcome ahead.

STEPHEN LONG: The fact is Australia was very lucky to achieve positive growth in the September quarter. You can thank the drought.

But for stronger than expected farm output coming out of the big dry, output across the economy would have gone backwards.

ALAN OSTER: The bottom line is the domestic part of the economy has essentially pretty close to stalled in the September quarter and I suspect the December quarter is not going to be a lot better.

STEPHEN LONG: Alan Oster, chief economist at NAB.

ALAN OSTER: The negatives that are coming out of this in terms of the low growth are really in the household sector and in the domestic part of the non-farm economy. In fact if you look at or take out the farm economy, the non-farm economy went backwards marginally by about 0.3 in the quarter so it's a pretty soft result basically.

STEPHEN LONG: And the reality is that only government spending stopped the economy from going backwards in the three months to the end of September.

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Rob Henderson

ROB HENDERSON: One of the things which has buoyed GDP is the strong contribution from government spending. That actually added 0.3 to the overall outcome so you take that 0.3 away from the 0.1, it's basically telling you that the private sector went backwards by about 0.2 of a per cent so domestic demand

is very weak, domestic final private demand.

Now what that means to us is that the numbers are likely to continue to be fairly poor over the summer. We expect for example unemployment to rise.

STEPHEN LONG: And it would have been worse, but for a build up in inventories, or unsold stock.

The statistician counts inventories as a positive contribution to economic growth. But in the real world, the build up of stock was wholly negative. It implied that business is accumulating stuff it can't sell.

Some think the big interest rate cuts and more than $10-billion in government handouts will stimulate the economy.

Others are doubtful. Josh Williamson.

JOSH WILLIAMSON: It's absolutely rational that after a decade of debt-fuelled expenditure growth, we have debt levels at record highs and asset values falling thanks to the collapse in equity prices, a collapse in superannuation and the nascent decline in housing prices that people will be using any extra windfall gains from government or from their employer to actually pay down debt and rebalance their household budgets.

What we are seeing right now, particularly for some generations which is generation Y or even for parts of generation X is an economic cycle which has never been seen before and this will actually help households de-leverage, calm down their expenditure, pay down debt and will significantly weakened consumption expenditure for years to come.

STEPHEN LONG: So will Australia avoid a recession?

JOSH WILLIAMSON: We certainly don't rule out the possibility of a recession. At this stage we do believe that sectors such as the manufacturing sector and indeed, areas of the retail and consumption sector sare actually experiencing recession at the moment.

STEPHEN LONG: Whether or not the economy enters a technical recession, two quarters of negative growth is a moot point.

The non-farm economy, where more than 90 per cent of us live and work, is already going backwards. Jobs growth has stalled, and joblessness is set to rise.

The downturn is upon us. The only question is, how bad will it get?

MARK COLVIN: Stephen Long.

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