Australian economy shrinks; currency drops

Wednesday 4th March 2009

Australia's economy unexpectedly contracted in the fourth quarter, stoking concern the lucky country may not skirt a recession that's engulfed many of its trading partners.

The Australian dollar tumbled and bond yields jumped after the report was released.

Gross domestic product fell 0.5% in the final three months of 2008, the first contraction in eight years, according to the Bureau of Statistics. Growth of 0.2% was expected, according to a Reuters survey, after the economy expanded 0.1% in the third quarter. The economy grew 0.3% from a year earlier, a quarter of the forecast 1.2%.

The figures come a day after the Reserve Bank of Australia elected to keep its benchmark interest rate unchanged at 3.25%, saying the federal government's A$88 billion fiscal stimulus package would help revive growth as exports drop and housing demand wanes. The Australian dollar dropped to 63.03 US cents from 63.77 cents immediately before the report was released. The kiwi dollar rose to 78.06 Australian cents from 77.49 cents.

"Sharply lower interest rates and fiscal policy will act to cushion the downturn - but, as is evident, can't fully offset the negative shock from the global recession," Westpac economists said in a report. "The RBA will be forced to revise down their growth view - bringing them more into line with Westpac's forecast. Expect more rate cuts and more fiscal stimulus."

The data highlights the "extremely difficult" global environment, Treasurer Wayne Swan said. "Nineteen of the 22 OECD countries that have reported December quarter figures contracted during the quarter and this weakness continues to weigh heavily on household spending, investment and exports," he said, according to the Australian.

The S&P/ASX 200 Index extended its declined after the report, falling 2% to 3155.4. Property companies posted the biggest slide, with the S&P/ASX 200 property Index tumbling 4.8% while the index of financial companies slid 2.3%.

Australian companies ran down inventories, which fell 1.6 percentage points, seasonally adjusted, the biggest negative contribution to expenditure on GDP, according to the report. Imports were the biggest positive contribution, at 1.7 percentage points. Household consumption increased by just 0.1% in the fourth quarter and consumer spending made no contribution to growth.

By Jonathan Underhill

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