Fed: RBA optimistic on outlook, data suggests otherwise

AAP General News (Australia)
02-18-2009
Fed: RBA optimistic on outlook, data suggests otherwise

By Colin Brinsden, Economics Correspondent

CANBERRA, Feb 18 AAP - One of the Reserve Bank of Australia's (RBA) top economists
believes Australia is better placed to ride out the global storm than other countries,
and that lower interest rates are helping.

The optimism came as new data pointed to a likely recession in coming months, and retail
spending fell short of expectations despite last year's $10.4 billion stimulus package.

The central bank's assistant governor of economics Malcolm Edey told a conference in
Sydney that while a global recession would have a more "synchronised" effect on Australia
than the downturn of the early 1990s, the economy had more momentum than others entering
the crisis.

"There are reasons to expect that the Australian economy can continue to perform better
than its international counterparts in the difficult period that lies ahead," he said.

Dr Edey said the federal government's $42 billion second fiscal stimulus package, and
aggressive interest rate cuts, would help support growth and that Australia's financial
system was in better shape than other economies.

"As a result of that, we have been able to gain much more traction from cuts in official
interest rates," he said.

The RBA has slashed the official cash rate by 400 basis points since September, while
financial markets are fully pricing in a further 50 basis point reduction when the central
bank's board next meets in March.

Dr Edey and the bank's governor Glenn Stevens will face their six-monthly grilling
by the House of Representatives economics committee in Canberra on Friday.

Despite the RBA's upbeat outlook, a leading index of future economic growth pointed
to a recession in coming months.

The annualised growth rate of the Westpac-Melbourne Institute leading index of economic
activity, which indicates the likely pace of economic growth in three to nine months time,
was minus 1.2 per cent in December.

"Despite some modest upward revisions, the growth rate in the leading index remained
in negative territory for the second consecutive month," Westpac senior economist Matthew
Hassan said.

"In the past, this has been a useful indication of a likely recession in Australia."

At the same time, official data for retail sales turnover for final three months of
2008 fell short of economists' expectations, despite the government's $8.7 billion of
cash handouts under its first stimulus package.

Retail trade turnover rose by a seasonally adjusted 0.8 per cent in the December quarter
to a record $53.3 billion, rebounding from a weak performance over the preceding nine
months.

Economists had expected a 1.1 per cent increase.

ABN AMRO senior economist Felicity Emmett said the "disappointing" result capped off
a very weak year for retail trade with sales just 0.6 per cent higher than a year ago.

"Excluding the GST period (mid-2000), this is the weakest pace of annual growth since
the tail-end of the last recession," she said.

Still, Treasurer Wayne Swan said the 1.8 per cent increase in value terms for retail
sales for the quarter was a "solid" result.

"Just consider that result and compare it with what happened in the United States in
the December quarter - retails sales in the United States in the December quarter fell
by seven per cent," Mr Swan told reporters in Sydney.

"This is a solid result and I think it shows that our economic strategy supported employment
in Australia during this critical period."

Joe Hockey, who was elevated to the position of opposition treasury spokesman this
week, was unimpressed.

"It wasn't money well spent because only a fraction of the $10 billion (stimulus package)
ended up in retail sales," he told reporters in Cairns.

"If Australia is not in recession, then many Australians will feel like it is."

AAP cb/tnF/JLW

KEYWORD: ECONOMY WRAP

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