Australia Faces the ‘Full Brunt’ of Global Recession

By Victoria Batchelor

July 3 (Bloomberg) -- Australia’s economy, which has so far skirted the global recession, may stall after reports showed exports dropped to a 14-month low, bank lending fell and home- building approvals declined by the most since 2002.

Australia was one of few major economies including China and India to grow in the first quarter as government cash handouts and record interest-rate cuts stoked consumer spending. Gross domestic product expanded 0.4 percent from the previous three months, in contrast to a 3.8 percent decline in Japan and a 1.4 percent contraction in the U.S.

This week’s reports suggest the global recession is biting as stimulus efforts fade, which may prompt the central bank to cut interest rates. Reserve Bank Governor Glenn Stevens said last month that slower growth and inflation give him scope to reduce borrowing costs if it helps secure “a durable upswing.”

“The full brunt of the deepest and most synchronized post- war global recession has yet to fully bear down on Australia,” said Su-Lin Ong, Sydney-based senior economist at RBC Capital Markets. “Export income, the terms of trade and business investment are all set to move substantially lower in 2009.”

The benchmark S&P/ASX 200 stock index dropped 1.8 percent to 3,806.5 at 10:11 a.m. in Sydney. Australia’s dollar slipped 0.2 percent to 79.26 U.S. cents, headed for its biggest weekly decline against its U.S. counterpart in seven weeks.

Economy Flatlines

The local currency fell 1.8 percent yesterday after a government report showed exports slumped 5 percent in May from April, widening the trade deficit to A$556 million ($448 million). Economists surveyed by Bloomberg expected a A$125 million shortfall.

Imports of capital goods, which include trucks and machinery, tumbled 14 percent, a sign businesses are cutting capital spending, yesterday’s report showed.

“As Australia’s GDP flatlines and unemployment climbs, the central bank may have to cut interest rates,” said Annette Beacher, senior strategist at TD Securities Ltd. in Singapore.

All 20 economists surveyed by Bloomberg News prior to this week’s economic reports forecast Stevens would leave the overnight cash rate target unchanged at 3 percent on July 7. The central bank reduced the benchmark by 4.25 percentage points between September and April to a 49-year low.

Lower prices for coal and iron ore have damped a mining boom that has driven Australia’s 17 years of economic expansion. BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group have cut output, fired workers and reduced capital expenditure in response to the slowdown in world demand.

‘Reality Check’

“The numbers this week provide a reality check for markets that continue to price in interest-rate hikes in early 2010,” RBC Capital Market’s Ong said.

Traders expect Australia’s overnight cash rate target will be 42 basis points higher in 12 months, a Credit Suisse Group AG index based on interest-rate swaps showed at 10:15 p.m. in Sydney. Earlier this week, the index was pricing in 63 basis points in rate increases in a year.

Further signs of weakness in the economy include a July 1 report that showed approvals to build or renovate houses and apartments fell 12.5 percent in May from April, the biggest drop since November 2002. The decline was led by apartments, which tumbled 43.6 percent.

Lending by Australian financial institutions slipped 0.1 percent in May, led by a 0.7 percent decline in borrowing by companies, the central bank said this week. Sales of newly built homes slumped 5.7 percent from April, the first drop this year, the Housing Industry Association reported on June 30.

Spending Rises

Still, there was evidence this week of strength in a key area of the Australian economy. Retail sales increased 1 percent in May, twice as much as economists estimated, buoyed by spending at department stores and restaurants. The services industry expanded for the first time in 15 months in June, according to an index today from Commonwealth Bank of Australia and the Australian Industry Group.

Consumer spending rose 0.6 percent in the first quarter, accounting for three-quarters of the Australian economy’s growth in the period.

The S&P/ASX 200 stock index climbed 10 percent in the three months ended June 30, the first increase in seven quarters, on optimism of a recovery. Retailers David Jones Ltd. and JB Hi-Fi Ltd. have both raised their profit forecasts in recent weeks because of a pickup in sales.

The government has distributed A$12 billion in cash handouts to households this year. Adding to stimulus measures, Treasurer Wayne Swan allocated A$22 billion in his May budget to upgrade roads, railways, ports and hospitals over four years.

“Arguably there is still some pain ahead, but clearly Australia has been faring much better than other developed economies,” Rod Pearse, chief executive officer of Sydney-based Boral Ltd., Australia’s largest seller of building materials, said in a speech last week. The government’s “significant” stimulus will provide support to the building industry, he added.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.