Are we already in recession?

Is Australia already in recession? According to the experts there has to be two successive quarters of negative GDP growth and we have only had one so far.

The economy went backwards in the December quarter, and that was before the real effects from the global meltdown had reached us.

The Prime minister and the Treasurer are constantly telling us to go out and spend, spend even giving us the stimulus package to do so. It won't save the economy and it could even make your situation worse.

In the December quarter, Australians saved a bigger slice of their incomes than at any time in the past 20 years. A large part of that would have come from home loan borrowers taking the big drop in interest rates to flow through to higher repayments, rather than taking the money and spending it.

The Treasurer now claims that the figures would have been even worse, without the Governments' first stimulus package, and that the second stimulus package will save the economy as the year unfolds.

What really matters is what is going to happen to the Australian economy for the rest of the year and what the Government will do about it? Also what the Reserve Bank can do?

The GDP figures released last week showed a modest fall in the economy. The headline number was minus 0.5 per cent for the December quarter. This meant that we still grew 0.3 per cent over the year.

Assistant Governor Malcolm Edey detailed in his recent speech how the combined economics of our major trading partners - Japan, China, the US and Europe shrank by much more than 1.5 per cent in the quarter. This was the biggest slump in the last 20 years.

We have been shielded from much of this because of the price of our commodity exports, coal and iron ore which are still at boom levels but only for a while longer. This tells us that the global economic storm is yet to reach us. But it will come soon and with a vengeance.

This explains why the RBA left interest rates on hold this month. It wants to keep some ammunition for when things really get tough.

Published on March 3-th, 2009 in Financial Planning
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.