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Avoid the R-word

The big question everyone is asking is whether Australia will go into recession. I’ve been saying it all along: more good news is needed to boost confidence and get global stock markets back on track. However, even with a struggling USA, UK and Europe, we still might avoid the confidence-crushing headline: Australia in Recession!

The Australian economy contracted 0.5% in the December quarter. That’s one quarter, but lets hope we don’t see it happen a second time.

Remember, a technical recession is two quarters of negative growth. Craig James from CommSec said on multiple occasions through the month that Australia is in with a chance not to go into recession and he reiterated the point recently in his regular newsletter: “Australia can avoid recession in 2009…”

And this little canvassed view which is supported by the Reserve Bank, Treasury and the likes of chief economist John Edwards of HSBC is important. It could explain why our S&P/ASX 200 was down only 5.5% in February while the S&P 500 in the USA was down 10% and the Dow Jones index dropped 11%!

James also pointed out earlier in the month that the Australian economy is in a better position than most Western economies: “One key factor is the adjustment of the Australian dollar. The global economy has slowed, commodity prices have fallen, so the Aussie dollar should fall. And it has. The lower Aussie dollar is providing valuable support for our exporters at a difficult time. Certainly exporters in Japan, the US and even Europe haven’t had the same support,” he said.

While it’s important to be realistic about the Global Financial Crisis, there is good news out there and you can follow it daily on the Switzer website at Good News Daily.

Business and consumer confidence are low, but there was good news with the Reserve Bank slicing the cash rate of interest by a further 1%, taking it down to 3.25% - down 4% from last September and the lowest it’s been in 40 years!

The result is that someone with a $400,000 home loan will now be given back an extra $1000 a month or $12,000 a year. The RBA decided to leave interest rates unchanged at their March meeting.

For those in the market for a new home, I pointed out in my Yahoo column that the fear of recession and losing jobs will hold back some potential homebuyers, but there is still time in this year to shop around. More people will start to turn up for auctions and house openings as confidences increases.

The banks have lowered their interest rates to reflect the RBA cut, but a word of warning, if you are taking out a mortgage, always make sure you ask “what will be the comparison rate of interest?” The comparison rate is the actual rate you will pay with all the fees and charges added on to the advertised rate. I’ve seen a few ads recently where while they do state the comparison rate, they play it down compared to the advertised rate.

Some economists say the cuts aren’t over, but that will depend on how dire the circumstances in Australia and overseas become. I believe the Reserve Bank is comfortable with the local economy, despite newspaper headlines, however, the global economy is still a worry. And if the some shocking news comes from abroad I believe we will see the cash rate tumble to 2%. If the news gets better then we might only get another 0.5% cut.

The Reserve Bank’s heavyweights - the Governor and his deputy in separate public appearances - only two weeks ago told us that they believe we’re positioned for growth this year, and many economists and analysts think the US will show economic recovery signs later in the year.

The Australian economic stimulus package was held up slightly last month with Senator Nick Xenophon holding Australia to ransom by demanding more money for the Murray-Darling basin before he gave his vote. It finally did go through, after spending for the river in South Australia was increased, and it will be interesting to see whether handouts to consumers will be spent to boost the economy as the Rudd Government intends, or if they will just be saved for a rainy day.

Our stock market and others around world follow Wall Street, and what we need to see is more good news coming out of the US. Federal Reserve chairman, Ben Bernanke, released a few details here and there about the bank rescue package but the Fed and the Obama administration need to provide hard facts in order to build confidence and get markets back on track.

On February 27 in the USA, the Yanks got a shocker of an economic growth number for the December quarter. The annualised number was down 6.25% and that was about 1% bigger than expected. GE also cut its dividend for the first time since World War II and the US Government took a bigger equity position into Citigroup, which hurt its share price.

However, even with these jolts the Dow Jones only fell 1.5%. I believe the hedge fund sell off madness has gone and now it is a battle of good news versus bad news and Obama’s team has been slow in piling up the good stuff. When it does there will be a big rebound. Even Shane Oliver and AMP research recently showed how history points to such an overdue outcome.

I know this is a harrowing time for everyone, I am in your boat, but the best line I seen in recent times comes from an old US analysts who wryly observed: “There have been 12 recessions since World War II and there have been 12 recoveries.” I counted 11 recessions, but it’s a great point anyway!

Published on: Friday, March 06, 2009

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