Australia: Deputy Reserve Bank Governor, Ric Battellino says the Australian economy is likely to shrink for a few more quarters, and there is room for more rate cuts. In a speech in Brisbane, deputy governor Ric Battellino said while tentative signs of improvement were surfacing in the world economy, with the United States beginning to repair its banking system and a possibly bottoming in the Chinese economy, Australia was not immune to the difficult times ahead and gross domestic product (GDP) was likely to fall in 2009.
“The reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world. As such, GDP is expected to fall in 2009,” Mr Battellino told the Urban Development Institute of Australia.
In questions following the luncheon, Mr Batellino said the Australian economy was likely to shrink for a few more quarters, though a tentative recovery could be seen later in the year.
“I think it’s likely that it further falls in the next few quarters,” Battellino said. “If all goes according to plan and (with) the forecast for the global economy, I think towards the end of this year we can start to look forward to some recovery activity.”
Mr Battellino said monetary policy had worked effectively, with the RBA cutting its key cash rate by 400 basis points since September.
“The monetary policy transmission process has been effective and there remains scope to ease policy further if circumstances require,” Mr Battellino told the conference ::::
The official cash rate is at a record low of 3.25 per cent. Investors are pricing in a further easing of at least 25 basis points at the central bank’s monthly policy meeting next week.
Mr Battellino said the US was making “reasonable progress” in restoring financial stability.
“On the real economy, we are starting to notice the odd positive economic indicator in the run of US monthly data, in contrast to the universally negative outcomes a few months ago,” the central banker said.
Mr Battellino said there were signs that measures taken by the Chinese central bank and government were improving the country’s economic outlook.
“There are some signs that these measures are starting to work. While China is not going to return to a 12 per cent growth rate any time soon, it is quite possible that the past six months will turn out to have been the maximum weakness in the Chinese economy,” he said.
Mr Battellino said he believed Chinese authorities, like others, were caught by surprise by the suddenness of the downturn.
The Chinese authorities had reacted with great speed and vigour in implementing monetary and fiscal measures to stimulate their economy, he said.
Mr Battellino said while Australia entered the downturn in much better shape than many other countries, good economic management could not totally shield the country from events in the global economy.
“There are limits on how much we can insulate ourselves from what is happening abroad, and therefore there are still some difficult times ahead,” Mr Battellino said.
“Nonetheless, the underpinnings of the Australian economy are sound, so we are well placed to benefit from the global economic recovery when it comes.”
Mr Batellino said the household sector was still in a relatively sound position, and the housing market had held up well compared with the US and the UK.
“We continue to believe that the market will hold up better than overseas,” he said, saying that lending standards had not deteriorated to the extent they had elsewhere.
Mr Battellino said the ability of central banks to improve economies by cutting interest rates has been limited by damaged financial institutions.
“Other central banks have also cut official rates sharply, but in many cases, because of problems in their banking sectors, this did not flow through to any great extent to interest rates faced by households and businesses. In essence, the monetary policy transmission mechanism in many countries has become severely impaired, which is why some central banks have resorted to non-traditional monetary measures,” he said.
Increased government spending and support for the housing industry, as well as banks passing on interest rate cuts, “go a long way in offsetting the negative influences on the economy coming from abroad.”