VZCZCXRO8712
RR RUEHPT
DE RUEHBY #0219/01 0630650
ZNR UUUUU ZZH
R 040650Z MAR 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 1144
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHDN/AMCONSUL SYDNEY 4314
RUEHBN/AMCONSUL MELBOURNE 6101
RUEHPT/AMCONSUL PERTH 4365
RUEHWL/AMEMBASSY WELLINGTON 5655

UNCLAS SECTION 01 OF 02 CANBERRA 000219 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP 
 
TAGS: EFIN ETRD ECON AS
SUBJECT: Australia Headed for Recession? 
 
REF: CANBERRA 214 
 
¶1. (U) SUMMARY: The Australian economy experienced its first 
quarterly negative growth in 8 years in the December quarter. Over 
2008, Australian trend GDP grew by only 0.6%, the weakest since 
1991, and negative growth in the March quarter will put the economy 
in technical recession. Treasurer Swan has suggested further 
stimulus measures could be implemented to counter the threat of 
recession in Australia. END SUMMARY. 
 
¶2. (U) National accounts figures released March 4 show that 
Australia appears closer to recession. The economy contracted by 
0.1% in the December quarter (0.5% seasonally adjusted).  Over the 
year trend GDP growth was 0.6%, while non-farm GDP decreased by 0.3% 
(0.8% in seasonally adjusted terms). The growth figure for the 
September quarter was not revised. The result was a surprise as a 
positive result was expected by many experts particularly after the 
Reserve Bank yesterday left the cash rate unchanged (ref A). Recent 
economic indicators have given mixed signals about the strength of 
the economy. 
 
- Pre-tax company profits slumped 17.8% in the December quarter, 
their biggest fall since March 1991, while a business survey by the 
Australian Industry Group showed conditions for manufacturing have 
got worse since then. On the other hand, retail sales increased by 
3.8% in December 2008 and 0.2% in January, defying market 
expectations of a 0.6% drop. 
 
- The slip into negative territory will see the Opposition argue 
that the Government's two economic stimulus packages, which included 
billions of dollars of cash handouts, have had little effect in 
stimulating the economy (although money from the second stimulus 
package has not been dispensed yet). 
 
¶3. (SBU) In trend terms, Australian GDP decreased by a more modest 
0.1% in the December quarter and non-farm GDP fell by 0.3%. This 
result reveals a stronger Australian economy with growth over 2008 
of 0.6%. Some of our contacts argue that there are technical reasons 
for preferring trend statistics because changes to the structure of 
the economy over the past five years have called into question the 
accuracy of the seasonal adjustment methodology.  Further, staff 
shortages at the Australian Bureau of Statistics have cast doubt on 
the seasonally adjusted series, according to senior Treasury 
contacts. 
 
AUSTRALIA'S EXPORTS AND TERMS OF TRADE WORSEN 
 
¶4. (U) In recent months, seven of Australia's top 10 trading 
partners including Japan, the US, New Zealand and the UK are already 
in or close to recession. The Australian Bureau of Agriculture and 
Resource Economics (ABARE) has forecast that Australian commodities 
exports will fall by 17% in 2009-10. Exports of energy and minerals 
in 2009-10 are expected to fall by 34%, driven by lower forecast 
prices for oil and coal. The terms of trade fell 2.8% in seasonally 
adjusted terms in the December quarter following a 6.2% increase in 
the September quarter. In the December quarter, in seasonally 
adjusted terms, net exports contributed 1.5 percentage points to GDP 
growth. Notably, the fall in the volume of imports had a significant 
positive impact on GDP. 
 
DIVERSE DRIVERS OF GROWTH 
 
¶5. (U) There are varying results for different sectors of the 
Australian economy. On the expenditure side, the growth (in 
seasonally adjusted volume terms) over the past four quarters was 
driven by machinery and equipment private investment (0.9 percentage 
points), private non-dwelling construction (contributing 0.8 
Qpoints), private non-dwelling construction (contributing 0.8 
percentage points) and exports of goods and services (0.8 percentage 
points). Offsetting the growth over the past four quarters was a 
rise in imports of goods and services (subtracting 0.6 percentage 
points). On the production side, the strongest contributing 
industries to GDP growth (in trend volume terms) over the past four 
quarters have been property and business services, and construction 
and Agriculture (all 0.3 percentage points). The biggest detractions 
have 
come from manufacturing (-0.2 percentage points) and finance and 
insurance (-0.3 percentage points). 
 
IMPORTANCE OF THE SECOND STIMULUS PACKAGE 
 
¶5. (U) Treasurer Wayne Swan said that the bigger than expected 
contraction in Australia's economy in the December quarter would 
have been much worse if the Government had not moved to stimulate 
the economy. Swan has been forced to defend the two stimulus 
packages, which contained billions of dollars worth of cash 
 
CANBERRA 00000219  002 OF 002 
 
 
handouts, in the wake of today's grim national accounts. Swan 
described the figures as sobering, but not surprising, but he 
refused to speculate whether Australia was closer to a recession. 
However, Australian households appear to becoming more cautious; 
with the household saving rate increasing to 6.6% in trend terms and 
8.5% in seasonally adjusted terms in the December quarter 2008, the 
highest since September 1990. This suggests a major part of the 
stimulus package payments could be saved. 
 
¶6. (SBU) COMMENT: The first negative quarterly GDP result for the 
Australian economy in eight years came as a surprise to most 
observers. If the March quarter is negative, then Australia will 
technically be in recession, despite the impact of the first 
stimulus package. Further, interest rates have fallen by 400 basis 
points since September 2008, boosting demand as the Reserve Bank has 
noted. The outlook is unclear but Australia could still avoid 
recession.  END COMMENT. 
 
CLUNE