While the impact of the global recession will ensure 2009 is a challenging year for Australia there are encouraging signs that economic conditions are stabilising.
The Westpac-Melbourne Institute Leading Index – which indicates the likely pace of economic activity three to nine months into the future – recorded its first substantive increase in May, rising from -6.0 to -5.1 per cent. Similar improvements in the months ahead could indicate an economic recovery – with an upswing as soon as Christmas not out of the question, Westpac said.
The Reserve Bank of Australia (RBA) is similarly optimistic that the economy could start to recover later in 2009.
In a speech on May 19, RBA governor Glenn Stevens said while it was too soon to call, developments over recent months were “consistent with the view that a recovery will get under way towards the end of the year“.
With conditions set to improve, the bottom of the interest rate cycle is closing in.
According to NAB, improved economic conditions are likely to see the cash rate bottom out at 2.5 per cent this year, rather than its previous forecast of 2 per cent.
But Westpac believes high debt levels will constrain the federal government’s ability to stimulate the economy – leaving it to the RBA, which will respond by lowering the cash rate to 2 per cent.
Either way, end 2009 is likely to be the end of the lowest cash rate in decades.
While prospects for the return of positive growth are growing, uncertainty remains over just how quickly the economy will recover.
In its 2009-10 budget handed down last month, the federal government forecast growth of 2.25 per cent in 2010-11 and as much as 4.5 per cent in 2011-12.
IMF staff forecasts in contrast indicate that the domestic economy will struggle to return to long-trend annual growth of 3 per cent before 2014.