In recent weeks both the Reserve Bank and Treasury have both been busy forecasting the length and depth of our current economic woes. And the conclusions include good and bad news.

 

The good news is that the Reserve Bank is forecasting that our current recession will be milder than the recession experienced during 1991. The Reserve Bank believes the healthier state of our financial sector, the recent recovery in the Chinese economy and the exchange rate depreciation will result in Australia having a less severe recession than in many other countries.

 

The bad news is that the Reserve Bank is still forecasting a significant contraction in our economy during most of 2009. However, in further good news, the Reserve Bank is forecasting that the domestic economy will again be growing by late 2009, although the recovery is expected to be very slow and very gradual.

 

The Reserve Bank believes that growth in consumer spending will remain subdued during 2009, particularly given the large decline in net worth and limited growth in wages experienced by most families over the past twelve months. Consumer spending is not expected to return to normal levels until late 2010. Business investment is forecast to fall, particularly during the remainder of 2009. The large falls in commodity prices and mining companies share prices are expected to result in considerable scaling-back of resource-related investment. However, due to the large amount of public infrastructure-related work in the pipeline, engineering construction appears likely to remain at reasonably high levels. Federal Government spending plans for education, rail, road and communications during the next eighteen months will boost growth in the infrastructure sector toward the end of 2009.

 

Treasury has good news too, forecasting that the Australian economy will withstand the pressures of the global recession better than most other countries. Treasury has noted that within our domestic economy, the financial system remains sound, interest rates have been lowered and fiscal policy stimulus applied. However, Treasury believes that the global recession has become so severe that fiscal and monetary policy cannot completely offset the negative impacts on the Australian economy. During 2009, Treasury believes that the main contributors to the slowdown will be falls in business investment, exports and household consumption. But strong growth in public infrastructure will provide a buffer, moderating the size of the slowdown. Treasury believes that a recovery in the domestic economy will gather pace over 2010, but with growth remaining below long term trend levels.

 

So, in summary, the good news seems to be a belief that our recession will be short and mild but the bad news is that it will take a long, long time before we see robust economic growth again. Of course, the biggest risk to our economic recovery is bad news emerging in relation to the US, European or Chinese economies, which would undermine a recovery in confidence.

 

Ross MacMillan holds a Bachelor of Commerce (Accounting, Finance and Systems) from the University of NSW, he is a member of the Institute of Chartered Accountants, member of the Securities & Derivatives Industry Association and a fellow of the Financial Services Institute of Australia.
 

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