23 April 2009

Last domino falls ~ Australian Economy in rapid decline

THE Australian economy will shrink faster than the global average this year, the International Monetary Fund said last night, foreshadowing another dire batch of revisions in next month's budget.

The predictions followed the release of mixed figures on inflation by the Bureau of Statistics. They showed inflation was falling, but perhaps not fast enough to trigger interest rate cuts by the Reserve Bank.

Australia's economy is set to contract by 1.4 per cent in 2009, the IMF said, before growing just 0.6 per cent next year.

The IMF's forecast is markedly worse than the 1 per cent growth for 2008-09 predicted by the Government in February, and is likely to be matched when revised figures are released in next month's budget. The Prime Minister, Kevin Rudd, told a business lunch in Perth that Australia was now in recession and the budget had been "ravaged".

Forecast revenue had plunged 63 per cent from that estimated in last May's budget and it would worsen further, he said.

Mr Rudd began setting the scene for Australia to go deeper into debt by saying "every responsible government around the world is being forced into greater levels of temporary borrowing". He said Malcolm Turnbull's promises had already committed the Opposition to a $177 billion debt and the Opposition Leader should "explain how he could provide economic stimulus while revenues are collapsing without undertaking further borrowing".

The Treasurer, Wayne Swan, said there had probably never been a more difficult time to put together a budget.

The budget would "support jobs, provide economic stimulus" and "make the necessary investments for the future so that when world growth returns we can take the maximum opportunities from that revival".

"Tough measures" are expected to include the means-testing of so-called middle-class welfare measures such as the Medicare safety net and the child care rebate.

The Government is also targeting tax loopholes such as using holiday homes and hobby farms as tax deductions.

In its latest World Economic Outlook, released ahead of its spring meetings in Washington this weekend, the IMF was far more gloomy about the outlook than its report in January.

Despite the efforts at stimulus worldwide, the IMF said global activity would decline 1.3 per cent in 2009. In January, it had predicted 0.5 per cent growth. "This downturn represents by far the deepest global recession since the Great Depression," it said.

It predicted Australia's economy would go backwards by 1.4 per cent this year and unemployment would hit 6.8 per cent, rising to 7.8 per cent in 2010.

The revisions have been driven by the severity of the slowdown in advanced economies since October 2008.

Advanced economies shrunk by an "unprecedented" 7.5 per cent in late 2008, the IMF said, and it is likely they contracted by a similar amount in the first three months of 2009. In advanced economies, GDP will contract by an average 3.8 per cent in 2009. But some nations - particularly those relying on manufactured exports such as Japan, Germany and Singapore - will be even more severely battered.

China is expected to maintain growth of 6.5 per cent in 2009.

The Bureau of Statistics said inflation increased by 0.1 per cent in the three months to the end of March, taking the yearly rate to a comfortable 2.5 per cent.

But the Reserve Bank's preferred measure of core inflation - which strips out volatile price swings - increased 1.1 per cent in the quarter, and remains above 4 per cent. Economists said the Reserve could use the relatively high result as an opportunity to wait before cutting rates further.

with Anne Davies


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