Wednesday, November 5, 2008

Economic Outlook Still Gloomy Despite Interest Rate Cut

Just As everybody was starting to feel good after the Reserve Bank of Australia delivered a larger than expected interest rate cut, Treasurer Wayne Swan has poured cold water over the party. The RBA announcement yesterday was widely welcomed as good news, with the expectation of relief for homeowners and business operators. Today, the Treasurer has revealed the Mid Year Economic and Fiscal Outlook projections, which don’t inspire quite so much good cheer.

While the interest rate cut is good news for people struggling with loan repayments, it’s a double edged sword. For example, retirees who might have been smart enough to move money out of equities and into cash will now see their returns reduced again. On top of that, the fact that the RBA is repeatedly delivering larger than expected reductions in the official cash rate could be interpreted as indicating that economic conditions are worse than we thought and therefore warrant a more extreme response. Today’s report lends weight to that idea.

Wayne Swan has warned that the Global Financial Crisis has created a $40 billion hole in the Federal Budget. The projections indicate that economic growth will continue to slow, and unemployment will continue to rise. Now, while some optimists are hoping that there will be a turning point in the early part of next year which will see the economic sunshine pouring in once again by 2010, the Mid Year Outlook indicates that unemployment will still be increasing in 2010. If that’s the case, the economic slowdown will be with us for some time yet, rather than somehow miraculously turning around in the next couple of months.

Despite the seriousness of the situation, it remains true that Australia is better placed than almost any other country to survive the crisis. Even if the official forecasts prove to be optimistic and the pessimists who predict recession turn out to be correct, the Government has the capacity to cushion the blow with a combination of welfare and economic stimulation measures. The Government has a budget surplus, a substantial cash reserve, and no net debt.

That’s reassuring because if the doom merchants are right, interest rates, employment rates, property prices, and business profits all have a lot further to fall before the crisis is over.

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