Australia Central Bank Says Recovery to Be ‘Gradual’

Australia’s central bank said a recovery from the first recession since 1991 will be “gradual” as the nation adjusts to lower export earnings and rising unemployment that will prompt consumers to cut spending.

Gross domestic product will shrink 1.25 percent in the 12 months through June, before rising 0.25 percent the following fiscal year, the central bank said in Sydney today. Three months ago, the bank forecast growth of 0.25 percent this fiscal year and 1.25 percent a year later. Inflation will slow to 1.5 percent in fiscal 2009, it said.

Governor Glenn Stevens and his board left the overnight cash rate target at a 49-year low of 3 percent this week and said record cuts since September and government spending will “provide significant support to domestic demand.” Retail sales jumped in March and employers unexpectedly added workers in April, reports showed this week, spurring speculation the central bank’s round of reductions may be close to an end.

“The economy is forecast to begin to grow from late 2009, although the recovery is expected to be gradual, partly reflecting the slow recovery in global demand,” the Reserve Bank said in its quarterly policy statement.

Australia’s recession will be “less severe” than in many other countries, helped by lower borrowing costs for home buyers and businesses, the nation’s healthier financial system, a decline in the currency and “the recent recovery in the Chinese economy.”

The Australian dollar was little changed at 75.37 U.S. cents as of 11:35 a.m. in Sydney, from 75.29 cents yesterday in New York.

Interest Rates

Investors expect Australia’s benchmark interest rate will be higher in a year, according to a Credit Suisse Group index based on swaps trading.

Traders forecast the overnight cash rate target will be 9 basis points higher in 12 months, the index showed at 8:28 a.m. today in Sydney. At the start of April, they forecast 37 basis points in reductions.

Stevens and his board slashed the benchmark rate by 4.25 percentage points between early September and April.

With interest rates at historically low levels, and some signs of stabilization in the world economy, policy makers “recently viewed it as appropriate to make smaller and less frequent adjustments to the cash rate than was the case up until February, when conditions were deteriorating rapidly,” today’s statement said.

Recovery Risks

Signs of a “turning point” in the global economy are a positive development, the bank said. “However, given the scale and nature of the downturn, the recovery of the world economy is likely to be gradual and to involve an extended period of sub- par growth.”

The Reserve Bank said risks to its prediction for a rebound include the threat that further bad news about the U.S. and European financial systems undermines a gradual recovery in global confidence.

“If this were to occur, the scope for policy makers in many advanced countries to take further steps to restore confidence may be constrained by the already large fiscal deficits” and because borrowing costs are already close to zero, today’s report said.

The global recovery in 2010 and 2011 will be “relatively subdued,” consistent with “past experiences in the aftermath of financial crisis.”

Trade Decline

Australia’s terms of trade, a measure of export earnings, is undergoing a “significant decline” that will weigh on domestic incomes over 2009, the bank said.

“Reduced government revenues from company taxes will also have implications for government finances,” it said.

Growth in consumer spending is expected to “remain subdued,” given the deterioration in the labor market and the large decline in household wealth over the past year, the statement said.

Unemployment has climbed from a three-decade low of 3.9 percent early last year to 5.4 percent in April, as companies such as Qantas Airways Ltd. fire workers amid falling demand for business travel.

Consumer spending will return to “more normal rates” by late 2010, the bank said.