Australia should escape recession

Australia will escape a recession although growth will be very flat, National Australia Bank (NAB) group chief economist Alan Oster predicts.

“Australia is showing a rapid slowdown according to our business confidence surveys, but last month the downturn stalled,” he told the CPA Congress in Melbourne.

Despite this, Oster said business confidence may have dropped lower in September.

Oster is predicting economic growth to slow to 2.25 per cent next year.

“The key issue now is the fall in commodity prices and the lower equity markets,” he said.

“However, mining and the farm sector will add 0.25 per cent [to] growth next year.”

To stimulate the economy, Oster sees the Government spending big next year and the Reserve Bank of Australia (RBA) continuing to cut rates.

“We are predicting a 50 basis point fall in November and another 50 basis point cut in March,” he said.

“Then the RBA will see what happens to the economy with these cuts. We expect rates to be at 4.5 per cent by the middle of next year.”

Oster said if the rate cuts have no impact, the bank expects a savage round of decreases to stimulate the economy.

Although the falling interest rate is good for the economy, Oster doesn’t see it boosting house prices.

NAB is predicting no growth in house prices in the Australian capital cities next year.

But the Australian housing market is not going to replicate the US, where prices are tipped to fall by 25 per cent.

“We still have a growing population and an undersupply of housing, so it is a different model to the US,” he said.

With business facing higher costs and a flat economy, unemployment is set to rise, with NAB predicting it will reach 6 per cent in 2009.

The key to Australia staying out of recession will be the surrounding emerging economies, especially China.

Oster said the Chinese economy has slowed to about 10 per cent growth and he sees this falling to 8 per cent in 2009 and 7 per cent the following year.

“The leading Chinese indicators show the economy is slowing, but we are not sure how much industrial production has slowed as the figures are not reliable,” he said.

“China was increasing rates to slow inflation, but the last couple of months have seen the Government easing rates to help the economy.”

Oster said retail sales in China were still up at 15 per cent, but there was a slowdown in exports as global demand falls.

“China will not fall over, its economy is still strong,” he said.

“The developed world will slow down and many countries are already in recession, but China will remain positive.”