Australia Central Bank Says Economy to Shrink in 2009

March 31 (Bloomberg) -- Australia’s economy will probably contract this year for the first time in almost two decades amid slumping global demand for exports, central bank Deputy Governor Ric Battellino said.

“There are limits on how much we can insulate ourselves from what is happening abroad, and therefore there are probably still some difficult times ahead,” Battellino told a conference in Brisbane today. Gross domestic product is “likely to fall in 2009,” he said. In February, the bank tipped 0.5 percent growth.

To stoke an economy that contracted in the fourth quarter for the first time in eight years as exporters such as BHP Billiton Ltd. shipped less coal and iron ore, policy makers have slashed the benchmark interest rate by a record four percentage points since early September to a 45-year low of 3.25 percent. The cuts “have been effective and there remains scope to ease policy further if circumstances require,” Battellino said.

“If they are going to move, it is better they cut rates sooner rather than later,” said Su-Lin Ong, a senior economist at RBC Capital Markets in Sydney. “Australia is not immune to what happens overseas, but is still better placed than many nations.”

The Australian dollar traded at 68.27 U.S. cents at noon in Sydney from 68.11 cents before the speech. Government bonds extended gains after the comments. The yield on the two-year note fell 6 basis points, or 0.06 percentage point, to 2.84 percent from yesterday.

Rate Outlook

The benchmark S&P/ASX 200 stock index fell 0.3 percent to 3593, led by shares of banks, mining companies and makers of building materials.

Reserve Bank of Australia policy makers will cut the overnight cash rate target by at least a quarter-point to 3 percent on April 7, according to 12 of 16 economists surveyed by Bloomberg News late last week. Four tipped no change.

Increased spending by Australia’s federal and state governments, including Prime Minister Kevin Rudd’s A$42 billion ($28.6 billion) stimulus package announced in February, will “go a long way” to offset negative influences on the economy coming from abroad, Battellino told an Urban Development Institute of Australia conference.

“Australia will remain one of the better-performing economies in the developed world and be well placed to benefit from the renewed global expansion when it comes,” he said.

About-Face

Still, his forecast for a drop in GDP this year comes less than two months after the bank predicted the economy would expand 0.25 percent in the 12 months through June, 0.5 percent in calendar 2009 and 2.5 percent next year.

“No amount of good economic management can totally shield us from what is happening in the global economy,” Battellino said.

The economy hasn’t been in a recession since 1991, when it shrank 1.3 percent, according to Anthony Thompson at Westpac Banking Corp., one of 16 economists surveyed by Bloomberg News who predict the economy is either in, or headed, for a recession.

While Battellino said he doesn’t know whether the economy is already in a recession, defined as two quarters of negative GDP, “most households will feel this downturn is severe enough that they’ll see it as a recession.”

Companies including underwear maker Pacific Brands Ltd. and BHP Billiton, the world’s biggest miner, fired the largest number of full-time workers in almost two decades in February, driving the jobless rate to a four-year high of 5.2 percent.

China Outlook

It will “be a while” before it’s known whether an economic slump has bottomed in China, Australia’s biggest trading partner, Battellino said.

“My guess is that the Chinese authorities, like everybody else, were caught by surprise at the suddenness of the downturn,” he said.

Given China has since “reacted with great speed and vigor in implementing monetary and fiscal measures to stimulate their economy,” it is possible the past six months will turn out to have been the period of “maximum weakness.”

Also, the U.S., the “country at the heart of the global crisis, is making reasonable progress” in attempts to restore its banking system, Battellino said.

Australia’s economy has also been affected by a halving of commodity prices from “boom levels” during the middle of last year, Battellino said. “This has resulted in a large loss of real income to the economy.”

Economy Contracts

GDP unexpectedly shrank 0.5 percent in the fourth quarter from the previous three months, and exports fell 5 percent in January, reports showed this month. Farm shipments dropped 3 percent and coal slumped 19 percent, the government said March 5.

Battellino said Australia’s central bank has reacted with a “very substantial lowering of interest rates,” which unlike many other countries, has pushed borrowing costs for businesses and households to “historically low levels.”

Households with an average-sized mortgage of A$250,000 are paying A$7,000 a year less than they were six months ago, which is equal to 8 percent of average family incomes, according to the central bank.