Recession Possible, Says Reserve Bank Head

The Age

Thursday November 20, 2008

PETER MARTIN, ECONOMICS CORRESPONDENT

AUSTRALIA may be unable to avoid a recession, Reserve Bank Governor Glenn Stevens has conceded.

Speaking to the Committee for the Economic Development of Australia in Melbourne last night, Mr Stevens said that until recently he had been thinking that the Australian economy would slow much as it had in 2001.

In that year Australia's economy contracted in one quarter - not two, which is the definition of recession.

As a result Australia along with Canada was alone among the major developed nations in avoiding the recession that swept through Europe and the United States.

But Governor Stevens said last night that recent international economic and financial events had made him believe that Australia would probably now experience "a more significant slowing than was otherwise going to occur".

"It is fairly clear that a recession in ... the G7 is under way," he told the audience.

However he believed that a bigger risk had been averted.

A collapse of an entire financial system with "massive repercussions throughout the world" was now unlikely.

"Markets are beginning to thaw. Actions taken to inject equity are stabilising a situation that could otherwise have unravelled quickly," Mr Stevens said.

While the guarantees that many countries were offering depositors and banks were helping, the Governor said it was imperative that governments sort out details quickly to give markets certainty.

Although the criticism was not directed at any country in particular, Australia is one of the countries that is yet to finalise the details of the wholesale funding guarantee it will offer banks.

The Governor's comments came as Westpac entertained the possibility of a recession, saying that contraction was possible in the September quarter and was likely in the March and June quarters.

"Growth will be around zero. Whether it's above or below zero is an open question, but two quarters of negative growth are certainly possible," said Westpac chief economist Bill Evans.

The Westpac-Melbourne Institute Leading Index slumped to an annualised growth rate of just 1.1 per cent in September from 3.5 per cent in August.

"This is a very disturbing fall," said Mr Evans.

The September fall was the biggest since the mid-1980s - greater than in the lead-up to the early 1990s recession.

"It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative," Mr Evans said.

The Reserve Bank Governor said the problem was that households fearful of a downturn were reining in their spending in an attempt to conserve their wealth. If everyone attempted to do that simultaneously it would bring on a "paradox of thrift", making the downturn deeper and destroying more of their wealth.