Australia shares world's economic woes

02 Sep, 2008

Things must be bad: revenues at Sydney's Star City casino are down by a quarter as the comfort blanket of a red-hot resources sector slips away and more people feel the chill of the global financial freeze. Times must be good: the Queensland state government is spending 400,000 Australian dollars (about 350,000 US dollars) a month carting water to Cloncurry, a copper and gold mining town that is running low on supplies because its population has doubled in the past five years.
And there it is: a two-speed economy - tough times in Sydney, where a fifth of Australians live, but dollars aplenty in boom towns like Cloncurry. "Rumours of the death of the Australian economy are overdone," said Savanth Sebastian, economist at stockbroker CommSec. But gloom and doom is there in heaps.
In the last three months banks have reported their lowest mortgage-lending figures since 1982. In Adelaide, the clearance rate at house auctions is nearer to a third than the three-quarters it was a year ago.
The stock market, like house prices, is in the doldrums. Consumer spending is being walloped by high interest rates and the cost of petrol. Charities in Sydney rattle the tin in vain. "It seems people don't have the 25 bucks to give away," a spokesman of the Fred Hollows Foundation said.
Some fear the resources boom - the biggest run-up in mining fortunes since the gold rush in the 1850s - is running out of puff. But this alarum needs to be set against business investment levels at their highest rate in 25 years. Because iron ore and coal export contracts are for 12 months, it might be next year before global gloom translates into lower prices for the country's two biggest exports.
The two-speed economy has placed the Reserve Bank of Australia (RBA) in a quandary: Should the central bank keep the cost of money high so that it can fulfil its required duty of keeping inflation below 3 per cent? Or should it recognise the need for a boost for all those sections of the economy not benefiting from the run up in commodity prices?
Australians will find out this week which way the RBA will go. The betting is on a cut to the official interest rate now at a 12-year high of 7.25 per cent. The quarter-per-cent reduction expected when the board of the RBA gathers for its monthly meeting on Tuesday would reverse a process that has seen the cost of borrowing increase 12 times in a row since 2002.
Some complain that the RBA has persisted with a tight monetary policy for too long. They argue that recession is the worst fear, not a breakout in prices and pay rates. UBS investment bank economist Scott Haslem worries that in the three months to July the economy hadn't registered any growth. That would mean Australia joining Britain and other industrialised economies heading for recession.
One argument is that a combination of rising petrol prices and falling asset values has already done the work that interest rate increases are supposed to do and choked off inflationary pressures. Brendan Nelson, opposition Liberal Party leader in Parliament, takes the view that all the battering that needs to be done has been done.
"We've had a global liquidity crisis, we've had very tight monetary policy, we've had a high Australian dollar, we've had crippling petrol prices," he said. "When you look at all of the indicators somebody has to say it. I think we're in the environment where the Reserve could easily justify a 50-basis-point cut." But most analysts are sticking with a 25-basis-point cut, followed by perhaps two more of that amount by the end of the year.

Read Comments