Australian economy finally succumbs to recession

Reserve Bank Governor Glenn Stevens admits the Australian economy is in recession, and has no precedent for avoiding a downturn of this size

Reserve Bank of Australia Governor Glenn Stevens admits the Australian economy is in recession, and has no precedent for avoiding a downturn of this size.

Stevens told directors at an Adelaide luncheon yesterday that Australia has trade and a financial linkage to the rest of the world, meaning its economy is inseparable from the current global slump.

"Whether or not the next GDP statistic, due in early June, shows another decline, I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession," he says.

Gross domestic product contracted by 0.5 percent in the final three months of 2008, heralding the first fall in economic growth in eight years.

Australia has witnessed a number of recessions, including: the early 1950s, the early 1960s, the mid 1970s, the early 1980s and early 1990s.

Stevens assures that similar to the past, the 2008/09 recession is associated with international business cycles.

"There were significant mid-cycle slowdowns, which did not develop into recessions, in the mid 1960s and very early 1970s, the mid 1980s, the mid 1990s and 2000/2001," he says.

"In each of these periods, output slowed or even fell very briefly, the rate of unemployment stopped falling and/or rose, and inflation moderated."

While recessions appear inevitable, Stevens says there are ways to speed up the recovery process on an international level:

The financial system in the United States, United Kingdom and Europe need to be stabilised

Macroeconomic support is needed for aggregate demand

‘Exit-strategies’ need to accompany the repairing of financial system and macroeconomic stimulus

Stop perpetuating the so-called ‘global imbalances’ by avoiding misuse of abundant capital.

Focusing closer to home, he says Australia has a very good chance of recovery for a number of reasons:

It has strong political stability compared to other nations

The Government does not own or give direct financial support to the banking system

Public finances remain in good shape, with modest debt levels

Sensible policy frameworks – both macroeconomic and microeconomic – remain in place

Australia remains open for trade and investment, and has a capacity to deploy both its own and other people’s capital carefully and profitably

There is an exposure to, and an engagement with, an Asian region that still has the most dynamic growth potential in the world.

"There are rather few countries that have the potential to offer so attractive a proposition to international capital, and to their own citizens, over the years ahead. It is a proposition that, if pursued sensibly and consistently, offers the most secure basis for confidence in Australia’s future. It is such confidence that, more than anything else, will help to drive us along the road to recovery," Stevens says.

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