Is Australia in recession?

12th March 2012

Markets have been spooked by recent GDP figures showing that a marked weakening in the Australian economy, almost half analyst expectations. The weakness was attributed to falling business spending and a dramatic drop-off in domestic consumption. "Housing construction fell 3.9 per cent, the worst performance since the middle of 2009, while household spending growth was 0.5 per cent, half the rate of the third quarter."

Parts of Australia already appear to be suffering a recession: "The figures have prompted concerns that Tasmania and South Australia are already in recession." However, it adds that the resource states, Western Australia and Queensland, continue to perform strongly.

The Wall Street Journal points out that an average of 4,000 jobs has so far been created per month, not enough to prevent the unemployment rate from rising over time: "With the economy misfiring, Treasurer Wayne Swan faces an ever-increasing challenge to bring the federal budget back into surplus by June 30, 2013, as pledged."

Part of this can undoubtedly be attributed to the continued strength in the Australian dollar: "The strength of the Aussie dollar, up nearly 6 per cent against the US dollar since the start of January – and helped by Tuesday's move by the central bank to keep rates on hold – has overwhelmed a recovery in commodity prices." The Australian dollar is currently trading at 1:US$0.93. Historically, it has traded closer to 1:US$0.7.

This wouldn't necessarily be a problem. It is the 13th largest economy in the world, behind those of Italy and Spain and it is, after all, still growing, but there is a diminishing pool of AAA-rated countries for global fixed income managers to treat as safe havens. As such, it has found favour with a lot of fund managers.

Yields on Australian government bonds have moved in since the start of the year. The 10 year bonds were 3.8% at the start of the year and are now 4.1%. However, this is less significant a shift than that seen in the UK Government bonds since the start of the year (which moved from 1.98% to 2.2%). Investors are clearly not abandoning Australia just yet.

This may be because the Australian government still has a lot in its armoury. Interest rates are at 4.25%, among the highest of any developed nation. This was pointed out in the Wall Street Journal article: "Economists said the flow of news on the economy shows that it is underperforming and the central bank may have more work to do in the coming months and quarters, with one or two rate cuts likely.

"Overall the economy is tracking at a bit below trend growth…which we believe leaves the door open for the RBA to cut rates," said Paul Bloxham, chief economist at HSBC Australia."

The FT piece said that the real problem is that the recent figures have exposed Australia as a one-trick pony: "Recent economic data has highlighted the widening divergence between the fortunes of the mining sector and the rest of the Australian economy, which is being adversely impacted by the strong Australian dollar and consumer caution." Policymakers recognise this is an issue, but have as yet been unable to turn it around.

For the time being, Australia's rating is safe. Moody's said: "As one of the world's most advanced economies, the country has not only a significant natural resource sector – including minerals, hydrocarbons, and agriculture – but also well-developed manufacturing and service sectors".

"It also demonstrates strong governance indicators. In particular, the framework for fiscal policy is transparent and has, until now, consistently kept government debt at low levels."

Ultimately, Australia may be wobbling, but it still counts as a safe haven in a global economy where they are increasingly rare. It has some structural problems in its economy, but they are not as severe as those found in other AAA-rated economies.


More from Mindful Money:

Reading List: Is Greece's the longest recession in history?

Could the higher oil price tip Western economies into recession?

Can China avoid a hard landing?

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