Recession?

While the media and Federal Government have seemed keen to advertise that the economy is already in recession, and this may well be the case, the Reserve Bank has been far less eager to announce this. However, the RBA has now finally conceded that Australia will join the rest of the developed world in recession, although they have also noted that we are well placed to avoid the worst of the problems that are afflicting our major trading partners. The RBA is forecasting negative quarterly GDP outcomes for the next three quarters.  Real GDP is expected to fall by 1.25% in the year to June 2009.

On the international outlook, the RBA looks to be more pessimistic than the IMF’s recent assessment. The synchronised downturns in output and trade in the world economy in the past 2 quarters mean there is considerable downside risk to any growth forecasts. The falls in business and consumer confidence have exacerbated the recessions. The implication is that a recovery in confidence will be difficult to achieve quickly. And that any recovery in activity in the advanced economies is likely to be quite weak for a considerable time. Mainly because of the damage to the financial sectors and the subsequent contraction in global lending.

What does this mean for Interest rates?

The RBA is yet to endorse comments by other central banks that low rates will be in place for an extended period. But the focus on whether further cuts are needed and sub 2%pa inflation forecasts for 20011 probably amounts to the same thing. Low forecast inflation leaves the door open for further cuts in official interest rates later this year.

How will this effect investment markets?

Investment markets can generally be expected to move ahead of actual events, as investors generally look to buy on expected future performance rather than specifically on the current performance of an investment. This is evidenced by the recent improved performance of the Australian Stock market. Whether this rally continues will depend heavily on whether the optimism of the RBA for Australia’s medium term outlook is shared by us investors.

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