Speaking at the Australian Local Government Association’s National Constitutional Summit in December, Chief Economist and Former Vice President for BT Funds Management, Dr Chris Caton, said that while 2009 will be a better year for investors than 2008, the Australian economy will clearly get worse before it gets better.
“The US is in recession and the whole world is following,” he said. “But importantly, these recessions did not begin with the collapse of the Lehman Brothers.
“The United States has been in recession since very early in 2008, while Europe, Japan, the United Kingdom and New Zealand have been in recession for many months.”
The average recession in the US in the postwar period has lasted 10 months, but having been in recession for almost a year now, Dr Caton believes this one is almost into overtime already. However, he believes that we may begin to see a recovery by the middle of this year.
“An early sign of recovery is the labour market,” he said. “As the unemployment rate begins to lower, we know we are coming out of the recession.
“Employment growth is now worse than the previous two recessions – and that is not just in the US.
“Last year, the Australian Government deliberately slowed growth because it was growing at a rate too fast to maintain. But it slowed the growth too much and as a result, unemployment is going to rise.”
Dr Caton said history shows fairly convincingly that when unemployment rises, it either goes up by a little or it goes up by a lot.
“There is little or no middle ground,” he said. “Currently, unemployment is at 4.3 per cent, but if it goes through six per cent, chances are 8.5 would be more likely than seven per cent.
“Whatever the final figure, Australians are not used to rising unemployment. It hasn’t happened for seven years and the mere prosect of bad times ahead is already causing both businesses and consumers to cut back on discretionary spending.”
Dr Caton said he is not convinced Australia will go into recession, but said we will see a prolonged period of slow growth.
“The big uncertainty about the slowdown in Australia is the effect of falling commodity prices,” he said. “In the five years to the June quarter 2008, the commodity price boom meant that the ratio of Australia’s export prices to our import prices rose by an astonishing 65 per cent. There isn’t another developed country in the world that experienced that degree of largesse.
“The fall currently being experienced reflects the fact that prices were so far ahead of any sustainable long term trend.”
Dr Caton said the possibility that Australia can avoid a recession relies on the fact that our financial sector is in better shape than most, and that we have the ability to loosen both monetary policy and fiscal policy further.
“A lot of monetary stimulus has already been applied in Australia, but there is more still to come,” he said. “In the current circumstances, it would be the height of economic irresponsibility not to permit the Budget to fall into deficit.”
Dr Caton said while the Australian economy will get worse, markets don’t have to.
“Markets are forward looking,” he said. “They have not gone down because the markets have been bad, they have gone down because we expect they will be. They have already factored in a lot of the bad news still to come, and somewhere in 2009, perhaps the first half, there should be a solid market rise as economic recovery appears on the horizon.
“The large movement we are seeing at the moment is not a genuine market recovery, but a bounce. When we start seeing a gradual increase in the market of around half a per cent a day, it will be an indication of recovery.”
