Recession 2011

Recession 2011

The Reserve Bank has sharply cut its expectations for economic growth this year but raised its inflation forecast.

In its latest report card on monetary policy, the RBA has slashed growth expectations by one percentage point to 3.25 per cent. The statement was completed before the overnight rout on global share markets.

The RBA now has the difficult task of containing inflation while growth slows. And some analysts are predicting a double dip recession.

Here's finance reporter, Sue Lannin.

SUE LANNIN: The Reserve Bank's statement on monetary policy is the central bank's report card on the economy. The summer of natural disasters has played havoc, so now the RBA has slashed its expectations for economic growth this year.

Stephen Halmarick is head of investment markets research with Colonial First State.

STEPHEN HALMARICK: No I wasn't greatly surprised. I think it just reflects the reality that the first quarter of the year's GDP numbers were dramatically affected by the weather events and the consumer has been very soft over the first half of the year.

So I think the Reserve Bank's done the right thing in reflecting both of those events in their forecast.

SUE LANNIN: The RBA's now expects the economy to grow by just over 3 per cent in 2011, down from just over 4 per cent in it last forecast.

But it also sees inflation rising. It expects underlying inflation, which strips out volatile items like petrol, to peak at 3.25 per cent, that's above its target range. The Reserve Bank's mandate is to control inflation. Rising prices and slow growth are a tough balancing act.

Ben Jarman is a senior economist at JP Morgan.

BEN JARMAN: Unfortunately for the RBA that's not a variable they have a great deal of control over. But, nevertheless, if it's generating inflation, you know they have to react to that to keep inflation expectations anchored.

SUE LANNIN: The Reserve Bank says it's worried that things could get worse in the United States and Europe. It's warned that could seriously disrupt financial markets and it notes that there's no money left in the government kitty if that happens.

Satyajit Das is a risk analyst and author. He thinks there could be another global financial crisis.

SATYAJIT DAS: Well we're not there yet, but I think the risk is not zero anymore. And I think the fundamental thing that you've got to remember is we're now talking about governments around the world, which means people use government bonds as a safe store of value.

For instance, all the banks in Europe and around the world own a heck of a lot of government bonds. So if these government bonds were to get into trouble and have to be written down, you wouldn't have a government problem alone, you'd have a banking sector problem.

And remember last time around governments bailed out the banks so we're going around in a circular way and there is really then now way out.

SUE LANNIN: US investment bank, Morgan Stanley, is predicting a double-dip recession in the United States and the chance of a recession here as well next year.

James Holt is an investment strategist with Black Rock. He thinks global and local share markets are now in a bear market, a prolonged period of falling prices. But he still thinks the jury is still out on a recession.

JAMES HOLT: To have a recession this soon globally, you know, is pretty unusual. And it will only be in the next couple of months that people will know if it is still a mid-cycle slowdown or there is more of a downturn.

But it is very unusual for a second recession to hit globally at this point in time. It is actually very different to the norm.

SUE LANNIN: The yields on long-term Australian government bonds have dropped below the official interest rate of 4.75 per cent, that's a sign that markets expect recession.

Stephen Halmarick again.

STEPHEN HALMARICK: Bond yields right across the yield curve in Australia, all the way out past 10 years are now below the cash rate. So that's telling us that global markets are expecting quite a significant slowdown, I think, in the global economy and that the interest rate cut that the markets have priced in here for Australia will be in the context of significant global economic weakness and further monetary policies across the world.

SUE LANNIN: And what are your expectations for Australia? Do you expect at least one interest rate cut, possibly more?

STEPHEN HALMARICK: No, I think the best assumption we can make at the moment is the Reserve Bank will continue to hold interest rates unchanged.

I think we have to remember that rates have been unchanged since November last year, so for quite some time interest rates have been held steady and it does look like now that that's going to remain the case, I think, for quite a number of months to come.

SUE LANNIN: In its statement on monetary policy the RBA says it will look through the current turmoil when deciding interest rate policy. That's code for being on hold for the time being.