Rba Chief Tips 100,000 Jobs To Go, But Says A Recession Is Unlikely

The Age

Tuesday September 9, 2008

By Peter Martin. Economics Correspondent

THE Reserve Bank governor has conceded that a recession is possible, while warning that Australia's unemployment rate is set to increase to well above 5%, adding an extra 100,000 people to the unemployment queue.

In his first appearance before Federal Parliament's economics committee since cutting interest rates by 0.25 of a percentage point last week, Glenn Stevens said the bank's future decisions would be about whether to cut rates further, not whether to raise them.

"We have moved from a phase where the question was whether we had done enough to make sure inflation will come down over time, to one where the question will be whether we hold rates here or go down even more," he told the committee in Melbourne.

Asked whether the Reserve would be cutting rates again, Mr Stevens replied that he did not want to pre-empt decisions to be made by his board, adding that the financial markets had priced in further cuts and that he had "no particular agenda to either dissuade them or encourage them any further".

Although inflation would continue to rise, the battle to contain it had been won. It would begin falling within six months after peaking at 5%. The challenge for the Reserve would be to ensure that it brought about a soft landing.

"I think it would be dishonest to deny that there is any possibility at all of recession," Mr Stevens said.

"There is clearly some probability of that.

"The risk of recession is not zero, but the most likely outcome is a gradual slowdown."

Australia's unemployment rate, at present 4.3%, should begin climbing within months.

Asked how high it would climb, the governor replied that Australia's economic situation was similar to the "mid-cycle pause" of 2001.

"In that episode, the rate of unemployment rose by a percentage point or so over the next year to 18 months," he said.

"I'm not setting that up as a precise forecast. But the quality of that sort of episode is probably what we are experiencing."

An increase in Australia's rate of unemployment from 4.3% to 5.3% would add more than 100,000 Australians to the unemployment queue, pushing the number of unemployed from 471,000 to about 600,000.

The number of Australians with jobs would continue to climb, although much more slowly than the number of people wanting work.

As the governor addressed the committee, the ANZ Bank revealed that its survey of job advertisements had recorded its biggest monthly slide since 2001, collapsing 4.9% nationwide and by 7% in Victoria.

The Dun & Bradstreet survey showed that business executives expected conditions to decline further in the December quarter.

Mr Stevens said consumer and business confidence had not collapsed but was merely low.

"What I would say about the Reserve Bank board is that these people are pretty well plugged in to the business community, and I have not heard them speak of a collapse in confidence at all, in any of the discussions we have had," he told the committee.

"Perhaps they should get out more, governor," Steven Ciobo, the Opposition's small business spokesman replied.

Mr Stevens said Australian businesses appeared to have "enough confidence to have planned an enormous upgrade in investment spending".

"I suspect that not all that investment will get done. It probably can't get done actually. It would be too much for the economy to handle.

"But to me those plans do not seem consistent with a collapse in confidence," he said.

Told of a survey that rated Australian consumer confidence the second lowest in the OECD, Mr Stevens said he did not think that was right.

"I myself think there are grounds for a fair bit more confidence in Australia than there are in the US, the UK or in most of mainland Europe," he told the committee.

Mr Stevens said that in one respect the American subprime mortgage crisis had been good for Australia - it stopped the same sort of thing happening here.

"Some fringe players in the Australian mortgage market had lending standards not as bad as in the US, but they were prepared to take more risk. Had this gone on for five more years, we would have had more such lending.

"I suppose it is in some way fortunate for Australia that US lending standards fell over when they did from that point of view."

While some banks would be able to cut their rates independently of the Reserve Bank, he was not expecting them to.

"It's their call, but it doesn't strike me as likely," Mr Stevens said.

THOUGHTS OF GOVERNOR STEVENS

On interest rate rises this year:

"I don't think they were unnecessary. I think they had to be done."

On rate cuts to come:

"I can't come here and precommit or make a forecast about what the board's going to do in forthcoming meetings."

On recession:

"I think it would be dishonest to deny that there's any possibility at all of recession. There's clearly some probability of that."

On working families:

"I think it's been tough for many of them, particularly those that are indebted."