Australia Posts First Negative Quarter in Eight Years

Australian GDP fell for the first time in eight years and further contraction seems likely. However, the incipient downturn down-under should be less severe than in most other economies. The Aussie dollar could drift a bit lower in the month ahead as global economic conditions remain very weak

Growth Turns Negative Down-Under

The Australian economy contracted at an annualized rate of 2.1 percent in the fourth quarter of 2008 relative to the previous quarter (see top chart). Not only was the outturn weaker than most investors had expected, but it was the first negative number in eight years. Australia has joined most other countries in recession. That said, the negative number down-under was not nearly as bad as in many other major economies. For example, real GDP in the United States, the Euro-zone and the United Kingdom plunged at annualized rates of roughly six percent in the fourth quarter.

The downturn in the rest of the world showed up as a 3.3 percent decline in Australian exports in the fourth quarter. However, real imports plunged nearly 25 percent, which helps to explain the sharp decline in inventories. In other words, Australian businesses sold out of their existing stockpiles and imported less. If there is any good news in the GDP data it is that there is no inventory overhang that needs to be worked off in the quarters ahead.

Fixed investment spending managed to post a very modest gain - it rose only 0.2 percent - and personal consumption expenditures also edged up. Recently released data showed that retail spending managed to hold up fairly well through January (see middle chart). However the unemployment rate jumped from 4.5 percent in December to 4.8 percent in January. With the labor market starting to deteriorate, it seems likely that consumer spending will weaken as well in the months ahead.

Although the Australian economy will likely contract further, the downturn down-under should not be nearly as bad as in many other major economies. As noted above, inventories have already been pared back. In addition, economic policy has turned stimulative. The Reserve Bank of Australia has cut its policy rate by 400 bps since last September, although it decided to remain on hold at 3.25 percent this week. In addition, fiscal policy has also turned expansionary via a package of spending increases and tax cuts. Finally, the depreciation of the Australian dollar should help to constrain the downturn in exports.

Speaking of the Aussie dollar, the bottom chart shows that it has depreciated about 35 percent against the greenback since last summer as the outlook for the global economy deteriorated. Although most of the depreciation of the Aussie dollar is probably behind us, it should drift a bit lower versus the U.S. dollar in the months ahead as the global economy remains in recession and commodity prices stay low. However, the Aussie dollar should stabilize and start to recover and move higher again versus the U.S. dollar, probably later this year/early next year, as global economic prospects begin to improve.

Wachovia Corporation
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