Recession inevitable, Rudd says

Prime Minister Kevin Rudd has finally conceded the economy will be dragged into a
recession for the first time since the early 1990s.
Previously, he and Treasurer Wayne Swan had avoided using the "R" word, although
most economists have expressed the view the economy was either already in recession
or would be unable to dodge the dramatic downturn suffered by Australia's trading
partners.
"The worst global economic recession in 75 years means it's inevitable that
Australia will be dragged into recession," Mr Rudd told an economic forum in
Adelaide on Monday.
"The severity of the global recession has made it impossible for Australia to avoid
a further period of negative economic growth."
The economy recorded its first quarter of negative growth in eight years during the
final three months of 2008.
A recession is conventionally defined as two consecutive quarters of negative growth.
The March quarter economic growth reading will be released on June 3.
The government's admission comes despite its huge spending through stimulus
packages, the second of which includes a one-off tax bonus which many households
have yet to receive.
"Already he seems to be conceding this stimulus strategy of his, his big spending,
big debt strategy has failed," Opposition Leader Malcolm Turnbull told ABC Radio.
But he said Mr Rudd had uttered the "R" word merely to create a distraction.
"It is a classic Rudd tactic. He isn't able to provide Australians the facts about
the tragic events involving the unauthorised boat that blew up recently."
Mr Rudd's comments came as new data showed inflation pressures were clearly in
decline and won't stand in the way of the Reserve Bank of Australia (RBA) trimming
the official cash rate again if it needs to stimulate the economy further.
Wholesale prices - or the costs to business - unexpectedly fell in the first three
months of this year, the first drop since mid-2003.
Economists said the result presents some downside risk to their forecasts for
Wednesday's consumer price index (CPI), keeping inflation concerns very much on the
back burner.
"RBA officials won't be sitting on the edge of their seats in anticipation of this
week's inflation data," JP Morgan economist Helen Kevans said.
Minutes from the April RBA board meeting, when it cut the cash rate by a further 25
basis points, will be released on Tuesday, providing an insight for the decision,
and perhaps hinting to the likelihood of further rate cuts down the track.
Reserve Bank governor Glenn Stevens will give a lunchtime address to the Australian
Institute of Company Directors not long after the minutes are released.
Financial markets are pricing in a greater than even chance of a further 25 basis
points cut in May and a low for the cash rate of around 2.5 per cent later in the
year.
"We expect further modest rate cuts from the RBA, particularly given that it will be
difficult for RBA officials to sit on their hands as the unemployment rate rises
sharply in the months ahead," Ms Kevans said.
The producer price index (PPI) at the final stage of production fell 0.4 per cent in
the March quarter, after rising 1.3 per cent in the previous three months, the
Australian Bureau of Statistics said.
The decline was led by a 25 per cent drop in oil prices and a 1.5 per cent fall in
building costs.
The annual PPI rate subsided to its slowest pace in more than a year at 4.0 per
cent, compared with 6.4 per cent growth in the December quarter, and almost a full
percentage point lower than economists had predicted.
Price pressures in the earlier stages of the production chain were also much weaker,
which should put more downward pressure on consumer prices later in the year.
However, ANZ economist Riki Polygenis does not believe the economy is about to face
a period of deflation.
"While Australia is expected to experience recession, there will not be the same
collapse in demand - particularly from consumers ... being experienced elsewhere,"
she said.
Deflation would be disastrous for the government when it is trying to get people
spending through its stimulus packages, as there would be little incentive to
purchase major goods knowing they would be cheaper in the future.
Forecasts for Wednesday's March quarter CPI made prior to the PPI release centred on
a 0.5 per cent quarterly rise, which would cut the annual inflation rate to 2.9 per
cent and take it back within the RBA's two to three per cent target band.