Are we on the brink of recession?

After the economy shrank in the December quarter Australia could be on the brink of a recession for the first time in almost two decades. Australia was only spared a technical recession by the performance of the Agriculture sector.

The Australian reported that figures released by the Australian Bureau of Statistics today showed that the non-farm sector of the economy shrank in the September and December quarters.

Prime Minister Kevin Rudd has stated that Australia would drift into recession, and that recent data revealed that the nation could not continue to swim against the global economic tide and that Australia could reduce the impact of the global economic tide but that we could not stop it from happening.

Total gross domestic product declined 0.5 per cent in the December quarter, compared with growth of 0.1 per cent in the September quarter. It was the first time that the economy had contracted in a quarter in eight years. The economy grew 0.3 per cent over the year.

Rob Henderson NAB'S Capital chief economist reported that the GDP figures showed that the Australian economy was already in recession, even though there had not been two consecutive quarters of contraction. Mr. Henderson further stated that half a percent down after 0.1 per cent growth in the previous quarter was an extended period of weak growth. According to the US definition we would have a recession so that means that Australia is already in recession.

A senior official of the Reserve Bank yesterday warned that the Australian economy would be tough in 2009 but that it was in better shape than most other countries. Before the GDP figures were released Malcolm Edey an RBA assistant governor told a conference that Australia came into this period with better momentum and more scope than most to take expansionary policy measures.

Scott Haslem UBS's Chief economist expected the economy to contract further over the next two quarters, despite the massive stimulus from the government's $20 billion cash handouts and the five successive interest rate cuts.

The national accounts figures showed that household savings had soared in the fourth quarter, to reach the highest level since 1980's. Household savings rate rose to 8.5 per cent from 3.4 per cent, suggesting that 80 per cent of the government's $8.7 billion handout in December had been saved.

Things will get worse on the GDP front. Yesterdays result showed significant downward revisions to 2009 growth estimates by consensus as the fourth quarter sets the base for 2009. Treasurer Wayne Swan stated that the negative growth had been inevitable and was a sobering reflection of the extremely difficult global environment in which Australia's economy was operating.

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.