Australian Economy Shrinks for First Time in 8 Years

By Jacob Greber

March 4 (Bloomberg) -- Australia’s economy unexpectedly shrank in the fourth quarter for the first time in eight years as exports and housing slumped, increasing pressure on the central bank to resume cutting interest rates.

Gross domestic product fell 0.5 percent from the third quarter, when it increased 0.1 percent, the Bureau of Statistics said in Sydney today. The median estimate of 23 economists surveyed by Bloomberg News was for 0.2 percent growth.

The nation’s currency dropped on concern Australia is now in its first recession in two decades. Central bank Assistant Governor Malcolm Edey, part of a board that slashed the benchmark interest rate by a record four percentage points to a 45-year low of 3.25 percent before pausing this week, said today the economy faces more “short-term weakness.”

“The downturn has arrived,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. “The global recession will bear down on Australia’s economy in 2009. There will be more Reserve Bank rate cuts later in the year.”

The Australian dollar dropped to 63.32 U.S. cents at 1:40 p.m. in Sydney from 63.78 cents before today’s report, taking the currency’s decline in the past 12 months to 32 percent. The benchmark S&P/ASX 200 stock index slid 1.4 percent, and is now down 15 percent this year after slumping 41 percent in 2008.

The Australian economy grew 0.3 percent in the fourth quarter from a year earlier to complete 17 years of expansion, today’s report showed. Economists tipped 1.2 percent growth.

Housing, Exports

Housing investment fell 1.2 percent, detracting 0.1 percentage points from growth in the quarter. Exports dropped 0.8 percent, cutting 0.2 percentage points from GDP. A rundown in inventories detracted 1.4 percentage points. Consumer spending made no contribution to growth, today’s report showed.

“There are no quick fixes to the global recession, and many of its effects are yet to be fully felt,” Treasurer Wayne Swan said in Canberra today.

To stoke household spending, the government distributed A$8.9 billion ($5.6 billion) in cash handouts in December, helping fuel a 3.8 percent surge in retail sales in that month. Prime Minister Kevin Rudd said last month he will spend another A$42 billion on infrastructure and bonuses to families.

The U.S. economy shrank at a 6.2 percent annual pace in the fourth quarter, the biggest contraction since 1982. Japan’s economy contracted at the fastest pace since the 1974 oil shock. Exports from China, Australia’s biggest trading partner, slumped 17.5 percent in January, the most in almost 13 years.

Economies in the U.K., Germany, France, Italy and Canada also contracted during the December quarter.

Global Rates

Central banks around the world have slashed borrowing costs to try to protect their economies.

The U.S. Federal Reserve’s benchmark rate is close to zero, the Bank of England’s is the lowest since its creation in 1694 and the European Central Bank will probably trim its main rate on March 5 to 1.5 percent, the lowest level in 10 years of setting policy, according to economists.

“The Australian economy has not experienced the sort of large contraction seen elsewhere,” central bank Governor Glenn Stevens said yesterday after keeping the overnight cash rate target unchanged for the first time in seven months. The bank’s earlier rate cuts and government spending will provide “significant support” to growth, he said.

That boost will be needed as mining companies Rio Tinto Group and BHP Billiton Ltd. renegotiate contracts for iron ore destined for China amid expectations prices will fall. The world’s biggest miners secured price increases last year of as much as 97 percent.

Commodity Prices

Commodity exports from Australia, the world’s biggest shipper of iron ore, coal and wool, are forecast to decline in fiscal 2010 for the first time in six years, the Australian Bureau of Agricultural and Resource Economics said yesterday.

Sales may drop 17 percent from a record to A$162 billion in the 12 months ending June 30, 2010, the bureau said.

“The international deterioration has been so abrupt that it won’t be possible to avoid some short-term weakness here,” Assistant Governor Edey said today. This year “is shaping up as a very difficult year for the global economy.”

Traders forecast a 72 percent chance of a half-point reduction in the central bank’s benchmark rate when policy makers meet next on April 7, a Credit Suisse Index based on swaps trading showed at 1:36 p.m. in Sydney today.

Car Sales Drop

“Policy makers still have a lot more work to do,” said Ben Dinte, an economist at Macquarie Group Ltd. “The Australian economy is by no means immune from the sharp downturn globally. Investor and consumer confidence remain very fragile.”

Manufacturing contracted at a record pace last month as companies received fewer orders, fired workers and cut production, a report showed this week. Separate reports today showed demand for services shrank last month and sales of new cars slumped 21.9 percent from a year earlier.

The chain price index, a measure of retail prices, climbed 8.5 percent in the fourth quarter from a year earlier, today’s report showed.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net