Prime Minister Kevin Rudd has finally conceded the economy will be dragged into a recession for the first time since the early 1990s.
Previously, he and Treasurer Wayne Swan had avoided using the “R” word, although most economists have expressed the view the economy was either already in recession or would be unable to dodge the dramatic downturn suffered by Australia\’s trading partners.
“The worst global economic recession in 75 years means it\’s inevitable that Australia will be dragged into recession,” Mr Rudd told an economic forum in Adelaide on Monday.
“The severity of the global recession has made it impossible for Australia to avoid a further period of negative economic growth.”
The economy recorded its first quarter of negative growth in eight years during the final three months of 2008. A recession is defined as two consecutive quarters of negative growth.
The March quarter economic growth reading will be released on June 3.
Inflation pressures in decline
The government\’s admission came as new data showed inflation pressures were clearly in decline and won\’t stand in the way of the Reserve Bank of Australia (RBA) trimming the official cash rate again if it needs to stimulate the economy further.
Wholesale prices – or the costs to business – unexpectedly fell in the first three months of this year, the first drop since mid-2003.
Economists said the result presents some downside risk to their forecasts for Wednesday\’s consumer price index (CPI), keeping inflation concerns very much on the back burner.
“RBA officials won\’t be sitting on the edge of their seats in anticipation of this week\’s inflation data,” JP Morgan economist Helen Kevans said.
Minutes from the April RBA board meeting, when it cut the cash rate by a further 25 basis points, will be released on Tuesday, providing an insight for the decision, and perhaps hinting to the likelihood of further rate cuts down the track.
Reserve Bank governor Glenn Stevens will give a lunchtime address to the Australian Institute of Company Directors not long after the minutes are released.
Financial markets are pricing in a greater than even chance of a further 25 basis points cut in May and a low for the cash rate of around 2.5 per cent later in the year.
“We expect further modest rate cuts from the RBA, particularly given that it will be difficult for RBA officials to sit on their hands as the unemployment rate rises sharply in the months ahead,” Ms Kevans said.
The producer price index (PPI) at the final stage of production fell 0.4 per cent in the March quarter, after rising 1.3 per cent in the previous three months, the Australian Bureau of Statistics said.
The decline was led by a 25 per cent drop in oil prices and a 1.5 per cent fall in building costs.
The annual PPI rate subsided to its slowest pace in more than a year at 4.0 per cent, compared with 6.4 per cent growth in the December quarter, and almost a full percentage point lower than economists had predicted. Price pressures in the earlier stages of the production chain were also much weaker, which should put more downward pressure on consumer prices later in the year.
However, ANZ economist Riki Polygenis does not believe the economy is about to face a period of deflation. “While Australia is expected to experience recession, there will not be the same collapse in demand – particularly from consumers … being experienced elsewhere,” she said.
Deflation would be disastrous for the government when it is trying to get people spending through its stimulus packages, as there would be little incentive to purchase major goods knowing they would be cheaper in the future.
Forecasts for Wednesday\’s March quarter CPI made prior to the PPI release centred on a 0.5 per cent quarterly rise, which would cut the annual inflation rate to 2.9 per cent and take it back within the RBA\’s two to three per cent target band.