Economic Forecast

3 May 2009

The Australian economy is now in recession, due to the effects of the Global Financial Crisis (GFC) and high interest rates through to early 2008.

The weakness in the economy began with consumer spending, but is now spreading to business investment. Consequently, the economy began contracting in the December qurter 2008, and this contraction is likely to continue through to the June quarter 2009. The economy is expected to stagnate through the remainder of 2009. However, 2010 will see a return to economic growth.

2009

In 2009, GDP is forecast to contract by 1.2 per cent. The GFC, combined with the Reserve Bank holding on to high interest rates for too long in 2008, will see continued weakness in consumer spending and plummeting business investment.

2010

In 2010, KPMG Econtech expects economic growth to improve to 2.1 per cent.  Low interest rates will support a recovery in housing activity, while the competitive Australian dollar combined with an economic recovery in Asia will boost net exports.

Rudd Government Challenges

The Rudd Government has provided appropriate fiscal stimulus to reduce the depth of the recession. Importantly, most stimulus measures have been temporary in nature and so do not undermine the long-term budget position. The Rudd Government has also acted to secure the funding position of the banking system, limiting the credit squeeze flowing from the GFC.

The Rudd Government's next challenge will be to facilitate Australia being early rather than late to recover, compared with other economies. This will require a flexible approach to foreign investment to support a recovery in business investment. It will also require labour market flexibility, so that wages growth can weaken in line with the weak labour market, acting as an automatic stabiliser for the economy.

Comparison of Forecasts

This time last year, Econtech expected an economic slowdown in Australia, while the IMF was more optimistic, and expected a continuation of normal economic growth. Now that we are in the midst of a recession, both sets of forecasts have been downgraded, but the IMF downgrade is greater. Indeed, the IMF now forecasts a more protracted recession than does KPMG Econtech.

The latest IMF world forecasts, released in April 2009, show a protracted recession for Australia. A fall in GDP of 1.4 per cent in 2009 is followed by growth of only 0.6 per cent in 2010. However, inflation is forecast to remain above 1 per cent.

In contrast, in Australia KPMG Econtech expects this recession to resemble the early 1990s recession in depth and breadth. So while we forecast a similar fall in GDP to the IMF in 2009, we do expect economic recovery to begin during 2010, with economic growth of 2.1 per cent on a year-average basis and 3.6 per cent on a year-end basis. We agree that unemployment is likely to approach 8 per cent. However, we expect the recession to send inflation down close to zero.

  2009 2010
IMF  
GDP (year average) -1.4 0.6
CPI (year end) 1.9 1.1
unemployment (year average) 6.8 7.8
Econtech    
GDP (year average) -1.2 2.1
CPI (year end) 0.8 0.7
unemployment (year average) 6.0 7.5

For more information, email Dinar Prihardini or phone her on (02) 6248 1373.

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