economic update
Australia's economy contracted for the first time in 17 years unexpectedly in the December 2008 quarter.  National accounts showed that gross domestic product fell by 0.5 per cent in the three months to 31 December 2008, as company profits plunged, firms ran down their inventories and households boosted their savings whilst cutting spending.

The Reserve Bank of Australia decided to hold the cash rate at 3.25% on 3 March 2009.  However, economists predict that GDP will deteriorate further in the first half of the calendar year, increasing the likelihood that official interest rates may fall to around 2 per cent by mid –year.

A deterioration in GDP results highlights the risk that unemployment will accelerate faster than previously expected.  The pace of employment growth has slowed in recent months and leading indicators such as job ads reveal that the labour market is losing momentum in some sectors.

Whilst we welcome the "green shoots" of growth observed by US President Obama, a range of indicators suggest that conditions will continue to be challenging in the first half of this year.  Global commodity prices are set to have an adverse impact on national income.  National accounts showed that the terms of trade fell by almost 3 per cent in the December 2008 quarter due mainly to eight of Australia’s top 10 export markets being in recession.  As export prices decline, company profits will follow – profits fell 5.6 per cent in the December 2008 quarter, the biggest reduction in eight years.  The reduced corporate earnings is expected to have a negative impact on investment and unemployment.

Source:   The Australian Financial Review, 5 March 2009.  Pages 1 & 8.  “Growth Slumps: It’s a Recession” Authors Adrian Rollins and David Crowe.