By Koh Gui Qing
Australia can no longer escape slipping into its first recession in 18 years this year as unemployment is set to rise more than expected following a surprisingly sharp economic deterioration in the past month.
The weak spots, to name a few, include lower export earnings and slowing business investment, all in all painting a picture so grim some analysts wish to fast forward to recovery in 2010.
For the central bank, that means it may have to step up its efforts to spur growth, after already slashing its key cash rate by 3 percentage points to 4.25 percent since September in its most aggressive easing since the recession of the early 1990s.
"Certainly if we do see a big rise in the unemployment rate, then it would really put a lot more pressure on the Reserve Bank to keep on cutting rates," said Brian Redican, senior economist at Macquarie Bank.
That could pummel the Aussie dollar, which slumped a record 21 percent last year, by another 30 percent to as low as below $0.50 by the end of March, according to Morgan Stanley,
Analysts and the market predict the central bank to slash interest rates to around 2.5-3 percent by June.
Still slowing business investment as well as increasing evidence of a slowdown in China, Australia's biggest trading partner, could mean any economic recovery would have to wait until 2010.
"Recession already is baked in Australia's cake," said Stephen Walters, chief economist at JPMorgan, forecasting economic growth at virtually zero for all of 2009.
"The main headwind for households is rising unemployment: we anticipate a doubling of the jobless rate to 9 percent by the end of 2010."
RISING UNEMPLOYMENT
The jobless rate ended 2008 at a still low 4.4 percent — compared to 6.8 percent in the United States — but leading indicators such as job advertisements and business surveys all point to weakness ahead.
The government itself hopes the jobless rate will only climb to around 5.75 percent by the middle of next year, but most analysts see it heading north of 6 percent.
"That is really going to hold the key for the depth and the duration of this slowdown," Su-Lin Ong, a senior economist at RBC Capital Markets.
"Compared to the last recession, Australian households are more indebted now so labour market job security is going to be quite a big issue in terms of how much of an impact it has on overall growth," she said.
Private consumption makes up 60 percent of Australia's A$1.1 trillion ($785.7 billion) economy.
During Australia's last recession in 1991, unemployment peaked at 10.1 percent.
But rising unemployment could help Australia in the longer term as it would lead households, one of the most indebted in the world, to save more.
Household savings as a proportion of income in Australia could climb towards 5-6 percent this year from 3-4 percent now, said Stephen Roberts, an economist at Nomura Research.
"Longer term, it means that there is actually a base for savings which people would be spending from. It would actually a healthier position for household spending longer term," Roberts said.
Debt as a proportion of disposable income is over 156 percent, compared to just 96 percent at the start of the decade.
For now though, the rise in savings could reduce spending by between an estimated A$3.5 to A$4 billion, he said.
Consumer spending totalled about A$600 billion in fiscal year 2007/08.
