Australia has joined its global peers in recession but the long-term prospects for growth remain sound as the economy should emerge from the contraction in better shape than most, Reserve Bank of Australia Governor Glenn Stevens said.
The candid admission that Australia's economy is shrinking matches a similar message from both Prime Minister Kevin Rudd and Treasurer Wayne Swan, both of whom this week signalled Australia is on track for its first recession since the early 1990s. "Whether or not the next GDP (gross domestic product) statistic, due in early June, shows another decline, I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession," the RBA governor said. Although slumping confidence means business investment is likely declining sharply, with reduced hiring plans, it's unlikely the pace of contraction in Australia will match that of its global peers, Stevens said. "The net result is that the Australian economy has been contracting, though on the best information we have, not at the pace seen in a number of other countries, where quarterly declines in real GDP of 3%, 4% or even 5% have been observed in the last quarter of 2008 and are likely to have occurred in the first quarter of 2009."
At the core of any domestic recovery will be China, which is showing tentative signs of a recovery, the governor said. "Perhaps what commodities markets are telling us is that some factors beneficial to Australia - foremost the continued likely emergence of China - remain in place. It is probably not entirely coincidental that the clearest signs of a turning point in economic activity appear to be accumulating in China, though not exclusively there." Also helping domestic demand are the positive aftershocks of a five year terms of trade boost which has so far not given up all of its 60% gains from the commodities boom, the governor said. "The terms of trade are falling, reversing part, though so far only part, of that earlier gain," Stevens said. "Even with the large falls in prospect for contract prices for bulk commodities, Australia's terms of trade look like they could, at the end of this year, still be about 40% than the average for the period from 1980 to 2000," he said.