Australia

Briefing Notes for the Launch in Canberra, March 2009

Contagion of recession

While the Australian economy sustained 18^th years of growth in 2008, it is not immune to global recession any longer. The economy sharply slowed down to 2.4% growth in 2008, compared to the 4.2% growth in 2007. Various indicators suggest that the contagion of recession is reaching to the Australian economy. Business and consumer confidences are falling, unemployment rate rising, and export growth evaporating.

A surge in commodity prices in 2008 benefited Australian exports and the trade balance recorded a surplus in the third quarter of 2008, for the first time since 2001. However, the delayed response of bulk commodity contract prices started to erode the export growth by the end of the year.

Tight labour market seen until 2007 came to an end. Unemployment rate edged up in 2008. With slow down of the economy, labour demand is likely to weaken, as indicated by a fall in employment intentions in the business surveys.

In addition to the lower consumer confidence in the face of global recession, slowing household consumption reflects that the households are rebalancing their consumption and debt payment. With tight monetary policy and steadily increasing interest rate until the beginning of 2008, household debt increased to 160% of disposable income by September 2008, compared to about 80% a decade ago.

Inflation intensified in 2008, in both producer price and consumer price index, however, with fall in oil price, softening labour market, and slow down of economy, inflation moderated by the end of 2008. Quarterly CPI in December recorded a decline for the first time in two years, -0.3% in December quarter.

Policy responses:

Amid the worsening global economic and financial outlook, the government announced “Economic Security Strategy”, A$10.4 billion economic stimulus package to boost domestic consumption. In addition, the government announced “Nation building and jobs plan” in February worth A$42 billion (3.6% of GDP) to help support and sustain up to 90,000 jobs through infrastructure investment, grants and tax cut.

Outlook

While fiscal and monetary policy measures are expected to help ease the deterioration of consumer confidence and ease the downward pressure on household consumption, economy is forecasted to weaken significantly in 2009 to 0.5% growth. With recessionary pressures and fall of commodity prices, inflation rate is forecasted to be contained, to 3.1% in 2009, down from 4.4% in 2008.