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Economy Watch Economy Watch #2, 11 May 2009 Welcome to the second Economy Watch for 2009! Over the past few months, the Australian economy has slowed sharply. During the December quarter, the Australian economy contracted 0.5 per cent representing the first negative quarter since December 2000. In this edition, Master Builders has added a ‘then and now’ special comparison between the 1990’s recession and the current downturn. Its Official, Australia Is In Recession: PM The Federal Government has now conceded that Australia is heading into a recession. Prime Minister Rudd stated on 22 April, "This global economic recession has also dragged Australia into recession and has also produced the single biggest collapse in tax revenues in post-war Australia''. The Reserve Bank of Australia (RBA) has forecast Australia’s recession to last more than a year with economic growth remaining in negative territory until June 2010. Global Economic Indicators The International Monetary Fund (IMF) has released its updated World Economic Outlook. This is the fifth time the Outlook has been updated in six months – a clear indication of just how quickly the global economy is moving. Figure 1. IMF Forecasts for the GDP of Advanced Economies (%) 2009 2009 2010 (released (revised (released April) January) April) Australia -0.2 -1.4 0.6 United States -1.6 -2.8 0.0 Japan -2.6 -6.2 0.5 United Kingdom -2.8 -4.1 -0.4 Euro Zone -2.0 -4.2 -0.4 Germany -2.5 -5.6 -1.0 France -1.9 -3.0 0.4 Source: IMF and the Australian Financial Review The IMF has stated that the current recession “represents by far the deepest global recession since the Great Depression”. The IMF expects the global economy to contract by 1.3 per cent, with advanced economies (such as the US, the UK and Australia) to contract by as much as 3.8 per cent. The IMF forecasts the global recession will cut output by $5.7 trillion and result in total global write-downs of $4 trillion. In its most recent Outlook, the IMF has revised its GDP forecasts for advanced economies in 2009. The first column in the table above is the January forecast; the second column is the April forecast. In the four months in between, the expectations for GDP growth has sharpely declined. Australian Stock Exchange Figure 2. Australian Stock Exchange – Daily Movements Source: The Trading Room Over the past six weeks, the Australian Stock Exchange (ASX) has continued to edge higher. While experts are divided over whether it is the beginning of a recovery or a ‘bear run’, it has injected some hope into the local community. Victorian Building Activity Victorian building activity figures for the financial year (July 2008 – Feb 09) are down compared to the same period in the previous year. Domestic building activity has declined by 3.6 per cent, residential activity down 21.4 per cent, and retail and industrial building activity have declined by 15 and 51.6 per cent respectively. Conversely, commercial building activity increased almost 17 per cent. As credit access continues to tighten and consumer confidence declines, it is likely that building activity will remain soft in the near term. Figure 3. Building Activity, July ‘08 – February ‘09 Source: Building Commission Interest Rates The RBA acted in April to cut the official interest rate by a quarter of one per cent. However, the RBA Board decided to keep the interest rate at three per cent when they met in May, citing that the effects of the Government’s Stimulus Packages are yet to be seen in the wider economy. While the RBA has moved to lower the official interest rate, most of the banks have been slow to pass on these cuts on to businesses. Master Builders have continually raised this issue with the State and Federal Governments and the RBA directly. Inflation Rate The Consumer Price Index (CPI) or inflation rate took a dive in the March quarter 2009. After three Government stimulus packages and aggressive interest rate cuts by the Reserve Bank, inflation decreased to 2.5 per cent – its lowest level for six quarters. The CPI was 3.7 per cent in the December quarter and 5.0 per cent in the September quarter 2008. Unemployment Rate The slowing Australian economy has seen a number of job losses across a variety of industry sectors, namely manufacturing and banking. The Federal Government has forecast the unemployment rate to reach seven per cent by June this year. However in a surprise result on 7 May, the national monthly unemployment rate declined 0.3 per cent to 5.4. The latest state figures available report Victorian unemployment at 5.5 per cent, New South Wales at 6.9 per cent and Queensland’s at 4.8 per cent. Economic forecasters predict official unemployment to rise much higher. Westpac forecasts 7.8 per cent unemployment by 2010, whereas Access Economics predicts a rise to 8.5 per cent. First Home Owners Grant Boost Since the Rudd Government announced the Boost to the First Home Owners Grant in October 2008, almost 14,500 Australians have taken advantage of the Grant. The proportion of first home buyers applying for financing to purchase homes has risen from 19.4 per cent in February 2008 to 26.9 per cent in February 2009. Rumours of the Boost’s imminent demise in recent weeks has caused a spike in applications, its fate will be revealed in next weeks Federal Budget. Emissions Trading Scheme Delayed The Federal Government has announced that it will delay the implementation of its Carbon Pollution Reduction Scheme (CPRS) for at least twelve months. This is good news for all builders and building product manufactures. The implementation of the carbon tax would have seen the cost of essential building materials such as glass, brick and steel, rise by approximately 10 per cent. Retail Spending – Up or Down? The Rudd Governments’ economic stimulus packages have focused on increasing consumer spending in the retail sector. Have the one-off payments to Australian families worked? ABS retail spending figures indicate that spending increased 3.8 per cent for December; compared to 0.3 per cent for the same month in 2007 (seasonally adjusted). Household goods retailing (eg. furniture and domestic electronic appliances) experienced the greatest boom, increasing 9.9 per cent. While this indicates that the stimulus packages has had some effect, it will still be some time before the full effects of both the October and February packages are felt through the whole economy. Comparing Recessions There has been a lot of talk from Government in the media about Australia’s ability to ‘weather the (economic) storm’. Master Builders has compiled a range of economic indicators to compare our current position (as of March 2009) to the recession of the early 1990’s. Figure 4. Recession Comparison 1990’s Recession $602,793 (1991-92 National GDP ($m) FY) Official Interest Rate 12.0% March 1991 Inflation Rate 4.9% March 1991 Unemployment Rate 8.9% March 1991 $AU to $US 0.7719 March 1991 Standard Lending Rates to Small Business 15.6% March 1991 (Variable with Small Overdraft) Current Recession $1,083,661 (2007-08 FY) 3.25% March 2009 2.5% March 2009 5.2% March 2009 0.6646 March 2009 8.95% March 2009 Source: RBA Skilled Labour Migration ‘457’ Temporary skilled labour migration visas have dropped over the past month as a result of government policy and the GFC. The number of visas issued in March dropped to 2,630 visas. Temporary visas for trades people declined over 80 per cent in the past month, with only 140 tradies granted visas. Homes Getting Larger, But More Expensive A recently released 20 year survey of housing size and building costs has found that Australian homes are a now a third larger yet four times more expensive. The average National cost to build a home during 2007-08 was $236,000, with an average floor plan of 239m². Victoria has had a similar experience. In 1987-88, the average cost to build a home in Victoria was $72,000 for an average 179m² home. In 2007-08, the average size of a Victorian home jumped to 241m², costing an average $226,000 – a 3.1 time increase in building costs. Internet Use in Businesses Internet usage is growing amongst Australian businesses and government services. Recent ABS data indicates that the majority of businesses are using higher speed non dial-up (eg. Broadband) internet rather than old dial-up internet (via a phone line). Between December 2007-08, the number of business and government users subscribing to non dial-up internet almost doubled. More than 1.3 million Australian businesses subscribed to the internet, just over a million of these use non-dial up internet. Print friendly Click here for a print friendly version. Unsubscribe Click here to unsubscribe.