Swan Says Australian Economic Recovery Will Be Modest (Update1)

Aug. 9 (Bloomberg) -- Australia’s full recovery from the global economic slump will be “a slow process” and the jobless rate is expected to rise further, Treasurer Wayne Swan said.

Fiscals stimulus has been “vital in cushioning us from the worst effects of the global recession,” Swan said in a weekly note on the state of the Asia-Pacific region’s fourth-largest economy.

The government distributed A$12 billion ($10 million) in cash handouts to households this year and pledged a further $22 billion to upgrade roads, railways, ports and hospitals, while the central bank cut its benchmark interest rate to a 49-year low. Reports last week showed retail sales climbed more than economists estimated in the second quarter and employers hired the most workers in more than a year in July.

“This is all heartening news but we’re not getting carried away,” Swan said today. “The pace of recovery is still expected to be modest.”

The economy has outperformed many other industrialized nations and bettered the Reserve Bank of Australia’s expectations as the government’s stimulus stoked consumer spending and strengthening Chinese demand for commodities supports the nation’s export industry.

‘V-Shaped Recovery’

Swan is trying to “downplay expectations -- it’s a traditional case of under-promising and over-delivering,” said Craig James, chief equities economist at Commonwealth Bank of Australia in Sydney. “We’ve got improvement happening in the rest of the world and it is increasingly looking like a V-shaped recovery here in Australia.”

Two days ago, the central bank scrapped a May forecast for the economy to contract 1 percent this year, instead predicting gross domestic product will expand 0.5 percent in 2009 before growing 2.25 percent next year.

The bank has kept the overnight cash rate target unchanged at 3 percent the past four months on signs of a pickup in the economy. Investors predict the benchmark rate will be 162 basis points higher in a year as Australia’s economy gathers pace, a Credit Suisse Group AG index of swaps trading showed on Aug. 7.

Retail sales adjusted to remove inflation jumped 2 percent from the previous quarter in the three months ended June 30 as consumers spent more at department stores, the statistics bureau reported on Aug. 4. In contrast, U.S. retail turnover dropped 1.6 percent in the same period, Canada’s fell 2.2 percent and Japan’s slumped 2.5 percent, according to Swan’s note.

The quarterly rise in Australian retail sales “will feed into the estimate of June-quarter GDP growth and it is the strongest increase in almost two years,” Swan said. “Our stimulus is working.”

Unemployment Rate

Australian employers unexpectedly added 32,200 workers in July, helping keep the jobless rate steady at 5.8 percent. The median estimate in a Bloomberg News survey of economists was for 18,000 jobs to be lost and unemployment to climb to 6 percent last month.

“Because of continuing difficulties in the global economy, the unemployment rate is expected to rise further,” Swan said today. “But the stimulus is playing a role in keeping the unemployment rate lower than it would otherwise be.”