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Varanus & the global credit crunch: the impact of two crises on the
Australian economy
Presentation to a CEDA conference
Perth Convention Exhibition Centre12th November 2008
Saul EslakeChief Economist, ANZ
2The Varanus Island explosion has had a material economic effect, though this has been mitigated by use of alternate energy sources
� The 3 June explosion at Apache Energy’s Varanus Island gas processing facility resulted in the loss of around 350TJ (30% of the WA’s total gas supply)
� Primary impacts have been on businesses supplied by Varanus Island gas (mostly in the mining and manufacturing sectors), which have faced reduced gas supplies and higher energy costs - residential supplies have been unaffected.
� Partial gas supply from Varanus Island resumed in early August, ramping up to 2/3 supply by mid-August. Full production is expected by the end of 2008.
� The shortfall in WA’s energy supplies has been mitigated by the use of alternate gas and other energy sources
─ North West Shelf production has been increased by 150TJ above normal
─ repairs and planned maintenance of coal power stations was expedited to bring them back online, while three retired power stations have been temporarily reinstated
─ there has been some substitution to diesel fuel as a source of power generation
� WA Treasury estimates that the total cost of the gas supply disruption will be around $2bn spread over the June and September quarters of 2008
─ GSP and consumption growth will be ½ pc pt lower, employment growth ¾ pc pt lower, and exports growth 1¼ pc pt lower than otherwise
� The disruption has reduced national GDP growth by around ¼ pc pt over the June and September quarters
3The economic impact of the Varanus Island has been less ‘visible than Longford, but will end up being at least as costly
� The explosion at the Esso gas facility at Longford in 1998 had significant human, social and economic costs
– 2 people were killed in the explosions
– Longford provided 98% of Victoria’s gas ─ with gas the primary energy source for 80% of Victorian households, 50% of commercial enterprises and 25% of industry
– 4mn consumers were left without gas for 19 days, while a further 89,000 businesses were similarly affected
� a Royal Commission established to investigate the causes and consequences of the Longford explosion estimated the cost to Victoria’s economy at $1.3bn (around 0.8% of gross State product t that year)
� The Varanus Island explosion has been somewhat less visible to the average person than Longford, since the bulk of the disruption has been borne by business.
� However Varanus is likely to be at least as costly in economic terms as Longford:
─ around 1/3 of businesses have been affected by energy supply disruptions and/or higher energy costs (although residential supplies and 2/3 of businesses not supplied by Varanus Island gas have been largely unaffected)
─ the economic cost has been mitigated by the use of alternative energy sources, with the bulk of the energy shortfall experienced over two months over June and July
4The current global financial crisis stems from the bursting of a‘credit market bubble’
From bubble …
Cheap andeasy money
Increased appetite for risk
Increased capacity for leverage
New forms of
‘financialengineering’
Rising asset prices
To bust ….
Falling asset prices
Reduced appetite for risk
Distrust of new forms of finance
Slowing economy
Reduced capacity for leverage
5For a time, low interest rates and the explosion in ‘sub-prime’lending created boom conditions in the US housing market
Mortgage applications
US housing market indicators up to 2005
Sources: Mortgage Bankers’ Association of America; US Commerce Department.
Mortgage interest rates
Home ownership rate
0
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08
% pa
30-year fixed rate
Adjustable-rate
'Fed funds'
(cash) rate
90
100
110
120
130
140
150
160
170
01 02 03 04 05 06 07 08
Index (Jan-Dec
2000 = 100)
Actual
Trend
67.0
67.5
68.0
68.5
69.0
69.5
01 02 03 04 05 06 07 08
% of households
Housing starts
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
01 02 03 04 05 06 07 08
Mns (annual rate)
Actual
Trend
6
But eventually the bubble burst, as bubbles always do
Mortgage applications
US housing market indicators up to 2008
Sources: Mortgage Bankers’ Association of America; US Commerce Department.
Mortgage interest rates
Home ownership rate
0
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08
% pa 30-year fixed rate
Adjustable-rate
'Fed funds'
(cash) rate
90
100
110
120
130
140
150
160
170
01 02 03 04 05 06 07 08
Index (Jan-Dec
2000 = 100)
ActualTrend
67.0
67.5
68.0
68.5
69.0
69.5
01 02 03 04 05 06 07 08
% of households
Housing starts
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
01 02 03 04 05 06 07 08
Mns (annual rate)
ActualTrend
7Excess supply of housing as a result of rising defaults and foreclosures is putting sustained downward pressure on prices
Existing houses for sale
US housing market indicators
Sources: US National Association of Realtors; Commerce Department; S&P (the Case-Shiller index).
Existing home prices
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
01 02 03 04 05 06 07 08
Mns
100
120
140
160
180
200
220
240
01 02 03 04 05 06 07 08
Jan 2000 = 100
Down 22%
from peak
Existing home sales
4.0
4.5
5.0
5.5
6.0
6.5
01 02 03 04 05 06 07 08
Mns (annual rate)
Housing affordability
100
105
110
115
120
125
130
135
140
01 02 03 04 05 06 07 08
Index
8The US mortgage market meltdown has prompted a tidal wave of losses and write-downs by banks around the world
Losses & write-downs announced since mid-2007
180.0Other institutions*
678.1Total banks
9.6Canadian banks
420.5US banks
220.7European banks
27.3Asian and other banks
Total (US$ bn)
Country of origin
US mortgage delinquencies
0
5
10
15
20
00 01 02 03 04 05 06 07 08
% of mortgages outstanding
90 days or more in arrearsSub-prime
Prime
ABX index of prices of US mortgage-backed securities
0
20
40
60
80
100
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
AAA rated
AA ratedBBB- rated
* ‘Other institutions’ include insurance companies, pension funds and hedge funds. Sources: US Mortgage Bankers’ Association; IMF; Bloomberg; ANZ Economics & Markets Research.
Capital raised by banks since mid-2007
672.3Total
3.1Canadian
351.2US
284.8European
288.5of which, from governments
33.2Asian and other
Total (US$ bn)
Country of origin
9
United States
Measures announced by governments since mid-October are slowly working to ease financial market stress
Euro area
Note: The 3-mth overnight index swap (OIS) rate shows market expectations of the average official cash rate overthe following three months. Source: Bloomberg.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
% pa
3-mth inter-
bank rate
3-mth overnight
index swap rate
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
% pa3-mth inter-
bank rate
3-mth overnight
index swap rate
United Kingdom
3.0
3.5
4.0
4.55.0
5.5
6.0
6.5
7.0
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
% pa 3-mth inter-
bank rate
3-mth overnight
index swap rate
Australia
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
% pa 3-mth
bank
bill
swap
rate
3-mth overnight
index swap rate
3-month inter-bank borrowing rates and official cash rates
10Banks in the US and the euro area are tightening credit standards
US banks
-40
-20
0
20
40
60
80
100
00 01 02 03 04 05 06 07 08
Net balance tightening standards (%)
Large
Small
Commercial & industrial loans
Mortgage and consumer loans
-20
0
20
40
60
80
00 01 02 03 04 05 06 07 08
Net balance tightening standards (%)
Mortgage*Consumer
Euro area banks
-20
0
20
40
60
00 01 02 03 04 05 06 07 08
Net balance tightening standards (%)
Loans to enterprises
Mortgage and consumer loans
-10
0
10
20
30
40
00 01 02 03 04 05 06 07 08
Net balance tightening standards (%)House
purchase
Consumer
* Weighted average of prime & sub-prime after June 2007Sources: US Federal Reserve and European Central Bank surveys of loan officers.
11
Capitalization of world equity markets
Investors around the world have lost US$23.2 trillion since the end of October 2007
Source: Datastream.
15
20
25
30
35
40
45
50
55
2000 2001 2002 2003 2004 2005 2006 2007 2008
US$ trillion
Peak-to-trough
decline from
31 Oct 2007:
US$27.6 trn
(46% of 2007
world GDP)
12Many indicators suggest that the US economy is heading for, or already in, recession
Selected US indicators
Note: shaded periods denote recessions as designated by National Bureau of Economic Research.Sources: The Conference Board; Bureau of Labor Statistics; Census Bureau.
40
60
80
100
120
140
160
80 84 88 92 96 00 04 08
1985 = 100 (trend)
Consumer confidence
4
5
6
7
8
9
10
11
80 84 88 92 96 00 04 08
% of labour force (trend)
Unemployment
8
10
12
14
16
18
20
80 84 88 92 96 00 04 08
Mns (annual rate; trend)
Motor vehicle sales
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
80 84 88 92 96 00 04 08
Mns (annual rate; trend)
Housing starts
13
-2
-1
0
1
2
3
4
5
6
7
8
00 01 02 03 04 05 06 07 08 09
% change from previous quarter
(seas. adj. annualized rate)
The US hasn’t experienced consecutive quarters of negative GDP growth – but is likely to in the current half year
US real GDP growth
Source: US Bureau of Economic Analysis. Shaded area denotes 2001 recession as designated byNational Bureau of Economic Research.
Note: 2001 recessiondid not feature successivecontractions in real GDP
14European economies are also experiencing an economic downturn with falling house prices and rising unemployment
Euro area
Business & consumer confidence
Unemployment
Sources: European Commission; Eurostat; Confederation of British Industry; UK Office of National Statistics (note UK unemployment measure based on claimant count).
7.0
7.5
8.0
8.5
9.0
9.5
01 02 03 04 05 06 07 08
%
UK
Unemployment
4.0
4.5
5.0
5.5
6.0
01 02 03 04 05 06 07 08
%
-25
-20
-15
-10
-5
0
5
10
01 02 03 04 05 06 07 08
Net balance (%)Business
Consumer
Business & consumer confidence
-60-50-40-30-20-1001020
01 02 03 04 05 06 07 08
Net balance (%)
Business
Consumer
15Japan’s economy has slowed sharply even though its banks have very little exposure to the global credit crisis
Business confidence
Consumer confidence
Sources: European Commission; Eurostat; Bank of Japan; Japan Economic & Social Research Institute; Japan Home Ministry.
Japan
Unemployment
3.5
4.0
4.5
5.0
5.5
01 02 03 04 05 06 07 08
%
Actual
Trend
Export volumes
-15
-10
-5
0
5
10
15
20
01 02 03 04 05 06 07 08
Net balance (%)
Trend
Actual
-60
-40
-20
0
20
40
01 02 03 04 05 06 07 08
Net balance (%) reporting
'better business conditions'Large companies
Small companies
30
35
40
45
50
55
01 02 03 04 05 06 07 08
% optimisticTokyo
All Japan
16
6
7
8
9
10
11
12
13
01 02 03 04 05 06 07 08
% change from year earlier
Slowest growth
rate since SARS
(2003)
China’s economy is slowing, reflecting slower export growth and an internal property slump
Chinese economic indicators
Real GDP growth
Industrial production
Source: China National Statistics Bureau; ANZ.
6
8
10
12
14
16
18
20
01 02 03 04 05 06 07 08
% change from year earlier
(6-mth moving avge)
Real estate prices
Exports
0
10
20
30
40
01 02 03 04 05 06 07 08
% change from year earlier
(6-mth moving avge)
(deflated by change in
export price index)
-4-2024681012
01 02 03 04 05 06 07 08
% change from year earlier
17
0
1
2
3
4
5
6
7
8
70 75 80 85 90 95 00 05 10
Real % change from year earlier
"Global
recession"
threshhold
Note: GDP is measured in US$ at purchasing power parities.Source: IMF World Economic Outlook October 2008; ANZ Economics & Markets Research.
Global economic growth
Global growth will weaken sharply with 2009 looking like the worst year for ‘advanced’ economies since the 1930s
-1
0
1
2
3
4
5
6
7
8
9
70 75 80 85 90 95 00 05 10
Real % change from year earlier
'Advanced' economies
'Developing'
economies
18
Oil Gold
Wheat
Commodity prices have fallen reflecting declining demand, the unwinding of speculative trades and a stronger US dollar
50
75
100
125
150
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
US$ per barrel
Base metals
Sources: Bloomberg; Datastream.
200
250
300
350
400
450
500
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
Index: 2 Jan 1996 = 100
600
650
700
750800
850
900
950
1000
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
US$ per oz.
200
300
400
500
600
700
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
US$/tonne
19Spot prices for Australia’s two largest commodity exports have fallen sharply in recent weeks and are likely to decline further
Coal prices
Sources: Datastream; Bloomberg; ANZ Economics & Markets Research.
Bulk commodity shipping costs
Iron ore prices
0
50
100
150
200
01 02 03 04 05 06 07 08
US$ per tonneSpot
(Indian)
Contract price
0
50
100
150
200
01 02 03 04 05 06 07 08
US$ per tonne
(thermal coal)Spot price
(ex-Newcastle)
Contract
price
0
5
10
15
20
01 02 03 04 05 06 07 08
x 1000
'Baltic freight
(cape size)
futures index
20
-2
-1
0
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08 09
Real % change from
year earlier
Real gross
domestic
product (GDP)
70
80
90
100
110
120
130
01 02 03 04 05 06 07 08 09
2005-06 = 100
A sharp fall in commodity prices will reverse the contribution which rising terms of trade have made to Australia’s income
Australia’s terms of trade(ratio of export to import prices)
Note: real gross domestic income (GDI) is real GDP adjusted for changes in the terms of trade; it measures the ‘purchasing power’ of the income associated with producing the GDP. Sources: ABS; ANZ.
Real gross domestic income (GDI) and product (GDP)
21But Australia is exposed to the global credit crunch because of our large external deficit and the way we finance it
Sources: IMF World Economic Outlook (October 2008); ABS; ANZ. Note that apparently large movements in ‘other (incl. reserves) in 2007-08 largely reflect the withdrawal of cash deposits at the RBA by the Future Fund; the RBA had invested these largely in US Treasuries, and they were reported as part of the RBA’s official reserve assets.
Financing Australia’s current account deficit
-50
-25
0
25
50
75
100
125
00 01 02 03 04 05 06 07 08
Net equity Banks' net borrowing
Other net borrowing Other (incl. reserves)
A$ bn - 4-qtr moving total
Current account deficit
Methods of financing
Current account deficits2008
0
25
50
75
100
125
150
175
200
225
US
Spain*
UK
France*
Italy*
Austra
lia
Greece*
Turkey
India
Portu
gal*
Romania
Brazil
Poland
Sth Afric
a
Mexico
US$ bn
US$664bn
* member of euro area
(deficit financed out of
Germany's surplus)
22
Banks’ short-term funding costs Corporate bond yield spreads
Bank share prices
Australian financial markets have come under similar pressures to their overseas counterparts, though these are now easing
Banks’ long-term funding costs
0
25
50
75
100
125
150
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
5-year swap spread (bp)
40
50
60
7080
90
100
110
120
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
31 Dec 2006 = 100
Note: all data shown as 5-day moving averages. Sources: Bloomberg; Datastream.
0
20
40
60
80
100
120
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
90-day Libor spread
over OIS (bp)
0
50
100
150
200
250
300
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
AA spread over 5-7 yr
gov't bond yields (bp)
23Consumer and business confidence have fallen sharply this year although both now seem to be stabilizing (for now, anyway)
Consumer confidence
Sources: Roy Morgan Research; National Australia Bank; ANZ
Business confidence
80
90
100
110
120
130
140
90 93 96 99 02 05 08
Ratio of optimists
to pessimists (%)
Actual
Trend
-30
-20
-10
0
10
20
30
40
90 93 96 99 02 05 08
Net balance of optimists
minus pessimists (%)
Actual
Trend
24Household spending and borrowing, and housing activity, have both slowed sharply over the past six months
Retail sales
Sources: ABS; ANZ Economics & Markets Research.
0
2
4
6
8
10
02 03 04 05 06 07 08
% change from year earlier
Actual
Trend
Motor vehicle sales
-10
-5
0
5
10
15
02 03 04 05 06 07 08
% change from year earlier
Actual
Trend
Housing finance commitments
-30
-15
0
15
30
45
60
02 03 04 05 06 07 08
% change from year earlier
ActualTrend
Residential building approvals
-20
-15
-10
-5
0
5
10
15
20
02 03 04 05 06 07 08
% change from year earlier
Actual
Trend
25
0
2
4
6
8
72 76 80 84 88 92 96 00 04 08
Ratio of gross operating surplus of
corporate trading enterprises to
interest paid
The corporate sector is (in general) in a strong financial position and shouldn’t need to cut labour costs aggressively
Australian non-financial corporate sector finances
Debt-equity ratio
Interest cover ratio
Note: Shaded areas denoted recessions.Sources: Australian Bureau of Statistics; Reserve Bank of Australia; ANZ.
50
75
100
125
150
175
88 92 96 00 04 08
%
Real unit labour costs
-6
-4
-2
0
2
4
6
8
72 76 80 84 88 92 96 00 04 08
% change from year earlier (trend)
‘Profit share’ of national income
15
20
25
30
72 76 80 84 88 92 96 00 04 08
Gross operating surplus of
corporate trading enterprises
(as a % of GDP)
26Australia’s housing market has clearly softened but is unlikely to become as dire as America’s
-20-15-10
-50510
1520
01 02 03 04 05 06 07 08
% change from year earlierAustralia
US
House prices
* 90 days or more past due. For Australia, securitized mortgages only (including on-balance sheet mortgages would result in a lower figure). Sources: ABS; US Commerce Department; S&P; Mortgage Bankers’Association of America.
Mortgage delinquency rates*
0
1
2
3
4
5
01 02 03 04 05 06 07 08
% of total loans outstanding
Australia
US
0.0
0.5
1.0
1.5
2.0
01 02 03 04 05 06 07 08
% change from year earlier
Australia
US
Population growth
50
75
100
125
150
175
01 02 03 04 05 06 07 08
1990s average = 100
Australia
US
Housing commencements
27
3.0
4.0
5.0
6.0
7.0
8.0
9.0
01 02 03 04 05 06 07 08 09 10
% pa
RBA official
cash rate
90-day
bank bill yield
The official cash rate will probably fall to a new low as the RBA seeks to counter the risk of recession
Short-term interest rates � The Reserve Bank has now cut its official cash rate by 2% in just two months (it took almost three years for them to raise it by as much)
� The larger-than-expected movements in October and November underscore the RBA’s capacity to respond decisively to deteriorating economic conditions and its willingness to do so
� Although inflation remains well above the 2-3% target the RBA is explicitly judging that lower commodity prices and weaker economic activity will reduce the inflation risk
� Significantly, this week’s post-Board meeting statement did not include any reference to the larger-than-expected move not setting a precedent for future meetings
� It now looks likely that the cash rate will fall below the previous trough of 4¼%
Sources: Thomson Financial; ANZ.
28Australia is also very well-placed to use fiscal policy (tax cuts and government spending) to support economic activity
Note: data shown are for the ‘general government’ sector, ie including State and local governments but excluding government business enterprises. Source: OECD, Economic Outlook 83, June 2008,
Budget surplus/deficit, 2008
-6
-4
-2
0
2
4
6
Korea
Sweden
Austra
lia
Spain
Canada
Germ
any
Japan
Italy
France
UK
US
% of GDP
Government net debt, 2008
-60
-40
-20
0
20
40
60
80
100
Korea
Sweden
Austra
lia
Spain
Canada
UK
France
Germ
any
US
Japan
Italy
% of GDP
29
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
01 02 03 04 05 06 07 08 09
2
3
4
5
6
7
8% change from
year earlier
Unemployment
(right scale)
Employment
(left scale)
%
-2
-1
0
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08 09
Real % change from
year earlier
GDP
(output)
Domestic final
demand (spending)
The economy will slow sharply (although it won’t contract outright) and unemployment will rise by around 1½ pc pts
Spending and output
Sources: Australian Bureau of Statistics; ANZ.
Employment and unemployment
30
A$ vs US$ and US$ vs other major currencies
The recent sharp drop in the A$ is partly a reflection of the rebound in the US$ …
Source: US Federal Reserve Board; Datastream.
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
2000 2001 2002 2003 2004 2005 2006 2007 2008
65
70
75
80
85
90
95
100
105
110
115
Mar 1973 = 100US$ per A$
Australian dollar
vs US dollar
(left scale)
Trade-weighted index of US$
vs other major currencies
(right scale, inverted)
31
US dollar vs euro US dollar trade weighted index(major currencies)
US dollar vs yuan
The US$ has risen against most currencies (other than the yen) in recent weeks because banks are hoarding dollars
1.20
1.30
1.40
1.50
1.60
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
US$ per € (inverted scale)
US dollar vs yen
Source: Datastream.
90
95
100
105
110
115
120
125
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
¥ per US$
68707274767880828486
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
Mar 1973 = 100
6.25
6.50
6.75
7.00
7.25
7.50
7.75
8.00
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
Yuan per US$
12-mth NDF
(non-deliverable
forward) rate
32
A$ vs US$ andcommodity prices
The A$’s decline also reflects plummeting commodity prices and the narrowing Australian-US interest rate spread
Source: US Federal Reserve Board; Datastream.
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
00 01 02 03 04 05 06 07 08
100
150
200
250
300
350
400
450
500
550
6001966 = 100US$ per A$
Australian dollar
vs US dollar
(left scale)
CRB index of industrial
commodity prices
(right scale)
A$ vs US$ and Australia-USinterest rate spreads
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
00 01 02 03 04 05 06 07 08
-100
0
100
200
300
400
500
600Basis pointsUS$ per A$
Australian dollar
vs US dollar (left scale)
Spread between
Australian & US
2-yr swap rates
(right scale)
33
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
01 02 03 04 05 06 07 08 09 10
US$ per A$
A$ likely to mirror US$ fluctuations in the near term but to trend towards the low US70’s over the next two years
A$ vs US$� In the near term, A$ likely to trade in a
US80-86¢ range mirroring fluctuations in the US$ against other major currencies
─ a slump in the US$ triggered by renewed financial strains (or uncertainty as to how they will be dealt with) could see the A$ closer to US90¢ again
� Beyond the near term, the A$ is likely to be pulled down by two factors:
– a narrowing of the interest rate spread between Australia and the US (from ~450bp at 90 days currently to less than 200bp by mid-2010)
– declining commodity prices (we expect a drop of ~20-25% in the RBA index in US$ terms by mid-2010)
� These considerations point to the A$ declining to a low of ~US60¢ by late 2009 or early 2010
Sources: Thomson Financial; ANZ.
34
Summary
� The world is confronting an extremely serious financial crisis– it is no longer a ‘sub-prime mortgage crisis’, or even solely a US financial crisis, but a global financial crisis
– however the measures announced in mid-October should, over time, prove effective in stemming the financial crisis
� There is now a high probability that a global recession is under way, with growth in the world economy falling to about 2½% next year– industrial countries as a group will experience negative growth for the first time since the 1930s
– developing country growth will slow to about 5%, from 7-8% pa during the past four years
� Australia’s economy is also slowing significantly, and unemployment will rise by nearly 2 pc pts from here, although the odds are good that Australia will avoid consecutive quarters of negative growth─ Australia’s financial system is more robust than that of most other Western countries
─ Australia will continue to benefit from developing country growth, albeit less so than previously expected
─ Australia has more scope to deploy economic policy instruments to support growth, and has already demonstrated its willingness to use them in a timely fashion
─ whether Australia experiences negative growth may depend on whether employers embark on across-the-board headcount reductions
� The RBA cash rate will fall to 3½% by Easter next year
� The A$ in an environment of global recession the currency is likely to settle in the mid- or even low US60s
35
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