So, Will There be a Recession or Not?

As other economies have fallen prey to recession, Australia’s has continued to grow, albeit at an ever decreasing pace.

Today, for the first time, Prime Minister Kevin Rudd has conceded that a recession is now inevitable in Australia. The cut in skilled migrant numbers announced earlier this year indicated the direction the economy was moving in.

Last week, finance minister Wayne Swan said the economy’s prospects had taken a turn for the worse after China’s growth fell from its customary double digit rate to 6.1 per cent. (Much of Australia’s huge mining output is exported to China.)

American financial commentator John Mauldin noted that this was not the whole story because China’s nominal growth was just 3.7%. The other 2.4% of apparent growth resulted from deflation. To get real (after-inflation) growth you subtract inflation and/or add deflation.

Meanwhile, as unemployment rises, Commonwealth Bank of Australia (CBA) chief executive Ralph Norris has taken a 10 per cent wage cut and has pledged there will be no more exports of Australian jobs to offshore centres for the next three years. The Finance Sector Union has called on the country’s other banks to take similar actions.

It’s not all good news from the CBA, however, as they have moved to increase interest rates on their fixed rate mortgages by 0.2 to 0.45 per cent. Although the next interest rate move from the Reserve Bank is expected to be downwards, the Commonwealth Bank says recent increases in the wholesale interest rates are pushing up their costs. Today a 5 year fixed mortgage from the CBA has an interest rate of 6.39% but this will increase to 6.84% tomorrow. The interest rate charged for a variable rate mortgage will continue to be 5.64%.

Australia’s Treasury and Reserve Bank believe the country is well prepared to weather the downturn because the amount of debt consumers have taken on compared with the assets they own has not grown significantly in recent years. The ratio of consumer debt to assets in Australia grew from 23 to 24 per cent between 2001 and 2006. By way of contrast, in America the ratio of mortgage debt to housing assets rose from 30 per cent to 45 per cent in 2006.