Lower and slower, that’s how the Reserve Bank sees the Australian economy travelling next year and into 2010.
But keep a war eye on inflation: at some time in the next 12 months, the persistence of inflation will halt the cuts while the central bank assesses the chances of an inflationary breakout, especially if the global slowdown proves to be shallower than it now seems.
But that seems unlikely.
Growth will be lower than previously forecast, export income will be hit hard, unemployment will rise as a result, inflation will take longer to ease, but interest rates will still continue to be cut for the next couple of months.
In the August Statement of Monetary Policy, inflation was the first word of the first paragraph in the introduction. In yesterday’s November statement, inflation wasn’t mentioned until paragraph 15 as the RBA went through the dramatic changes to the world economy since then.
The August statement of Monetary Policy from the Reserve Bank and its inflation first focus now seems so long ago as the bank battles to ease Australia into a sharp slowdown that will see growth in 2009 lower and slower than this year.
The US, UK, European and Japanese economies are slowing rapidly, or are in recession.
China overnight revealed an $A872 billion reflation package for the next two years to try and boost growth above 8% and keep it there. That dwarfs our $10.4 billion package, but looking at the RBA’s figures, you can see the need for it.
Our package is around 1% of GDP and assuming just over three quarters of that remains in the economy (the rest is saved or leaks out in imports), the boost could be the difference between keeping domestic demand in the December and March quarters positive, instead of perhaps contractionary.
Understandably, the RBA’s focus is now on growth and the emerging lack of it here and around the world. Falling commodity prices, falling export income means slowing growth next year.
The central bank hacked half a per cent of its August growth forecasts and now expects annualised GDP growth of 1.5% for 2008, 1.5% to June 2009 and 1.75% to December 2009. That compares with the previous forecast for 2%, 2.25% and 2.50%, respectively.
Non-farm growth will actually fall to just 1% this calendar year and 1.5% for the period to June next year.
So it’s no wonder the RBA has cut rates 2% since September as the world and Australian economies have slowed, leading to that 0.5% cut in its 2008 economic growth forecast and a large 0.75% chop in its 2009 growth estimate.
The RBA sees the economy lower and slower through all of 2009 and its end of year forecast of 1.75% GDP growth is below the 2% for this year.
The latest statement started with these worlds "World financial markets have come under severe stress in the period since the last Statement…” and that’s still the big story as the credit crunch drags down growth around the world, and inflation.
"These central forecasts reflect a judgment as to the net effect of a number of powerful influences, some contractionary and some stimulatory, on the Australian economy.
"Given the recent changes to the external environment – as reflected in sharp falls in financial and commodity markets and large downward revisions to the global growth forecasts – as well as the large depreciation of the exchange rate, the extent of uncertainty surrounding the forecasts is larger than usual.
"With the ongoing stresses in financial markets, it is possible that the deterioration in the external environment could continue.
"Even if this did not occur, the effects on domestic activity of the deterioration that has already occurred could be deeper or more persistent than expected in this outlook.
"In particular, a more rapid unwinding of the resources boom than has been assumed would have significant negative effects throughout the economy, resulting in softer growth in domestic incomes and spending. If so, there would be a quicker moderation in inflation.
"Furthermore, there is a risk that developments in capital markets could result in a sharper than foreshadowed reduction in the availability of credit to Australian households and businesses, thereby exacerbating the slowing in domestic activity.
"On the other hand, the global economy could rebound faster than currently anticipated. Governments and central banks around the world have responded to the market turmoil and global slowdown with numerous policy initiatives and further actions may well be forthcoming.
"In addition, the recent sharp falls in commodity markets could prove to be overdone. If so, the slowing in the domestic economy, especially in the resources sector, could be smaller than forecast here, and the decline in inflation would be more modest."
While the RBA sees consumer price inflation (CPI) and underlying inflation falling in 2009, the timetable for the expected decline to its 2%-3% target band has been pushed out six months to December 2010 from June 2010, when both measures are expected to reach 3%.
Annualised underlying inflation is now seen at 4.5% this year, 4% to June 2009 and 3.5% to December 2009. That compares to an earlier forecast for 4.5%, 3.75% and 3.25%, respectively.
But inflation remains close to the top of the list at the RBA, as it made clear at the end of the introduction to the statement:
"In reviewing the stance of policy each month in the period ahead, the Board will be seeking to strike the appropria
