Govt, RBA try to head off recession

The Reserve Bank of Australia (RBA) and the federal government have delivered a
double whammy in an attempt to prevent the economy sinking into recession.
The central bank continued its aggressive slashing of interest rates on Tuesday,
while the government delivered a new $42 billion stimulus package which includes
cash handouts and a large infrastructure investment.
But the government also predicted large budget deficits for at least the next three
years, weak economic growth and a jump in the unemployment rate to seven per cent
next year.
"No country will escape the impacts of the global recession, which is causing falls
in growth, job losses and budget deficits right across the world," Treasurer Wayne
Swan said.
"The weight of the global recession is now bearing down on the Australian economy."
The RBA cut its cash rate by a further 100 basis points to 3.25 per cent, the lowest
level in 45 years, and has reduced the rate by 400 basis points since September.
RBA governor Glenn Stevens said the combination of last year's financial turmoil, a
severe global downturn and substantial falls in commodity prices had led to a
significant dampening effect in confidence in Australia.
"In these circumstances, the board judged that a further sizeable reduction in the
cash rate was appropriate, to give further support to demand," Mr Stevens said in a
statement following Tuesday's board meeting.
A homeowner with an average $300,000 mortgage will save around a further $186 per
month as long as retail banks pass on the cut in full.
So far, only Westpac and ANZ have confirmed they will match the RBA's decision with
cuts to their variable home loan rates. Other banks are reviewing the situation.
Westpac said it would also cut its business loans by 100 basis points.
For its part, the government launched a new stimulus package - dubbed the Nation
Building and Jobs Plan - investing $28.8 billion in schools, housing and roads, and
providing cash handouts worth $12.7 billion to low and middle-income earners.
Workers earning below $100,000 will get up to $950 in a one-off payment in April.
It comes on top of the $10.4 billion stimulus package announced last October.
"This should be enough to keep the economy out of recession," Commonwealth
Securities chief economist Craig James said.
"The combination of significant rate cuts, handouts to low-income earners and
targeted infrastructure will keep the economy growing over the next year, albeit at
a more modest pace than in recent years."
Business groups gave the new package the thumbs up, but the federal opposition said
that while it wasn't against economic stimulus, it wanted to ensure taxpayer funds
were used to the best effect.
"We must not overlook the enormity of what we are seeing," Opposition Leader Malcolm
Turnbull said.
In what can only be described as a mini-budget, the government also updated last
November's Mid-Year Economic and Fiscal Outlook (MYEFO), slashing its economic and
employment growth forecasts.
Because of the sharp deterioration in global growth since November, gross domestic
product (GDP) is expected to grow by just 1.0 per cent in 2008-09, and by only 0.75
per cent the following year.
This compares with respective forecasts of 2.0 per cent and 2.25 per cent in November.
"If you looked carefully at the Treasury prognosis for the period ahead minus this
stimulus package, it will be quite clear that the economy would run a grave risk of
generating negative growth, most particularly in the (20)09-10 financial year,"
Prime Minister Kevin Rudd said.
Technically, a recession is two consecutive quarters of economic contraction.
While the government hopes to avoid a recession, more people are expected to lose
jobs as the economic downturn savages business, with the unemployment rate forecast
to rise to 5.5 per cent in 2008-09 and 7.0 per cent in 2009-10.
The unemployment rate was 4.5 per cent in December.
The budget is expected to sink into a $22.5 billion deficit in 2008-09 - a massive
deterioration from the $5.4 billion surplus projected in the MYEFO - while deficits
of over $30 billion are expected for the following two years.
This reflects the government's stimulus measures, increased welfare payments as
unemployment increases and $115 billion in lost tax revenues during the next four
years.