Australia Central Bank Cuts Economic Growth Forecasts

Feb. 6 (Bloomberg) -- Australia’s central bank slashed its forecasts for economic growth and inflation and said interest rates at the lowest level in more than four decades will “provide significant stimulus” to offset weaker export demand.

Gross domestic product will rise 0.25 percent in the 12 months through June, according to the Reserve Bank of Australia, which in November predicted growth of 1.5 percent for the same period. GDP will gain 0.5 percent through 2009 and 2.5 percent next year, the bank said today in Sydney.

To ward off the nation’s first recession since 1991, Governor Glenn Stevens has slashed the benchmark lending rate by 400 basis points since early September to a 45-year low of 3.25 percent. The government is also working to boost domestic consumption by pledging A$42 billion ($27 billion) in handouts to families and for infrastructure.

“While the international situation is likely to remain difficult for some time, the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the bank said in its quarterly policy statement.

Weaker economic growth and a slump in gasoline and commodity prices will slow inflation, which the bank aims to keep between 2 percent and 3 percent.

The consumer price index, which rose 3.7 percent in the fourth quarter, will climb 1.75 percent in the 12 months through June, compared with the bank’s November prediction of 3.25 percent, today’s statement said.

Currency, Bonds

The Australian dollar traded at 65.02 U.S. cents at 11:33 a.m. in Sydney from 64.98 cents before the statement was released. The two-year government bond yield rose 3 basis points, or 0.03 percentage point, to 2.74 percent.

“The international situation has deteriorated markedly over the past few months, and this is making for a more difficult environment for growth of the Australian economy,” the bank said. “In these circumstances, Australia’s inflation rate is likely to continue to decline.”

Almost all of Australia’s major trading partners, including China, Japan and the U.S., will experience growth rates of 2 percentage points or more below trend rates in 2009, the statement said. “This would represent the most synchronized downturn in Australia’s trading partners since the mid-1970s.”

Falling prices for resources, including coal and iron ore, will trigger a 20 percent drop between late 2008 and early 2010 in the nation’s terms of trade, a measure of earnings from exports, the bank said.

Boom Over

“Given the ongoing stresses in financial markets and the rapidity of the deterioration in the global situation in late 2008, it is possible that the world economy could weaken by more than has been assumed,” the statement said.

“A more rapid unwinding of the resources boom than has been assumed would have significant negative effects throughout the economy, resulting in softer growth in domestic incomes and spending.”

Even though there has been “significant stimulus” from the central bank’s recent interest-rate cuts and government spending, the nation’s jobless rate is forecast to “increase materially over the year ahead.”

Unemployment rose to a two-year high of 4.5 percent in December as companies such as miner BHP Billiton Ltd. and investment bank Macquarie Group Ltd. fired workers. Job cuts have eroded consumer confidence, demand for credit and house prices, recent reports show.

Household Spending

“Growth in household consumption spending is expected to remain subdued over much of the forecast period, given an expected weakening in employment” and a 10 percent drop in the net wealth of families, today’s statement said.

“However, the significant fiscal stimulus to households will provide support to consumption over the first half of 2009 and growth in spending is subsequently expected to gradually return to more normal rates,” the bank said.

Treasurer Wayne Swan said on Feb. 3 the government will spend A$12.7 billion on handouts to families and A$28.8 billion on infrastructure, sending the budget into its first deficit since 2001-2002.

The central bank’s policy makers have also responded to the threat of slower global and domestic growth by undertaking a “series of unusually large reductions in the cash rate,” including a one percentage point cut this week, the fifth since the start of September, today’s statement said.

“This has brought the monetary policy setting to a position that is providing significant stimulus to the economy, with the cash rate now well below its previous cyclical lows.”

Financial System

The Reserve Bank also said there is an “upside risk” to its reduced growth forecast if global policy makers are able to stabilize financial system to the point where growth in bank lending resumes and confidence gains.

“If so, when demand returns, production will pick up more quickly than in past cycles,” the statement said. “In such a scenario, a synchronized upturn in the world economy would be a distinct possibility.”

While the global financial system remains “under considerable strain, there have been some signs of an improvement in financial conditions recently,” the bank said.

“The extreme volatility that affected all markets in October and November” has abated in the past two months.