Australia's economy to stall in 2009

Research note - Australia's economy to stall in 2009; weak recovery in 2010

Australia is in the midst of the first recession since the early 1990s, the ripples of the global economic hurricane belatedly having washed ashore. In fact, we forecast virtually no growth in Australia’s economy in 2009, and growth of only 1.7% in 2010. The rebound depends on an anticipated improvement in global growth, which should support Australia’s exports.

Households currently are in a rare state of retreat, previously upbeat businesses are slashing investment and hiring, and commodity exports are in free-fall. Only a big rise in public spending is taking up some of the slack left by the weakening private side of the economy.

Australia does, however, have a number of advantages that should make this recession mild relative to dire conditions elsewhere. First, Australia exports commodities to China, where growth is holding up better than in most other economies. Second, Australia’s authorities retain plenty of policy ammunition, with the central Budget still (officially) in surplus and the cash rate at 4.25%, even though the RBA already has implemented the most aggressive policy easing since the last recession.

Third, the 28% plunge in trade-weighted AUD will help cushion the downside for exporters. Finally, largely absent a subprime lending legacy, Australia’s banking system is robust and, broadly speaking, corporate balance sheets are healthy.

Aussie_2009_outlook.pdf

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