Markets Recovery Falters

The Age

Wednesday December 3, 2008

VANESSA O'SHAUGHNESSY, INVESTMENT REPORTER

FEARS of a local recession have skittled a fledgling sharemarket recovery and unsettled investors, whipping up expectations of further interest rate cuts while the market awaits today's release of Australian economic growth figures.

Economists think the Reserve Bank will cut the official cash rate again in February, even after the RBA board yesterday slashed rates by a full percentage point.

In just three months, the deterioration in global financial markets and signs of economic stress worldwide have prompted Australia's central bank to slice interest rates by 3 percentage points, from 7.25 per cent to 4.25 per cent.

But the decisive action was yet another reminder of the global economy's wretched state, following the news that the US had indeed entered an official recession, in December last year.

And the S&P/ASX 200 Index closed 153 points, or 4.2 per cent, lower at 3528.2 points, almost erasing the memory of last week's historic gains.

The dollar also lost ground, falling from a high of US64.81 to a low of US63.36, although last night it was buying about US63.7.

ABN Amro equity strategist Greg Goodsell said sharp rate cuts were a "two-edged sword".

Lower rates took some pressure off businesses, by reducing the amount of interest they paid on their loans. But they also were a symptom of the difficult economic environment, where credit had been hard to obtain.

In his monetary policy statement, Reserve Bank governor Glenn Stevens said Australian had been "more resilient than other advanced economies".

But he noted: "Financial market sentiment remains fragile, as evidence accumulates of weak economic conditions in the major countries and a significant slowing in many emerging countries."

This week, manufacturing activity in Europe, China and Australia weakened.

Factory activity figures for the US nosedived to their lowest in 26 years, contributing to a 7.7per cent fall on the Dow Jones Industrial Average and an 8.9 per cent rout on the S&P 500 Index.

Meanwhile, a report from the National Bureau of Economic Research confirmed what many had suspected, that the US had entered an official recession.

The bureau's business cycle dating committee decided that the US economy had reached its peak in December 2007 and therefore entered a recession at that time.

"The peak marks the end of the expansion that began in November 2001 ... the expansion lasted 73 months," the committee said.

With Europe, Japan and Britain also on doubtful economic ground, investors fear Australia will fall into recession.

"The world is worried that Armageddon is coming," said National Australia Bank group chief economist Alan Oster, at a suburban breakfast briefing hosted by the City of Stonnington in Melbourne's east yesterday.

Mr Oster said he expected Australia's gross domestic product numbers, which will be released today, to show the Australian economy had grown slightly during the three months to September30. But he rejected the notion that Australia would have only entered a recession if the numbers had a minus sign in front of them.

"If you can't grow your economy at all in a 12-month period, you've got a serious problem," Mr Oster said.

However, retail sales numbers for October were stronger than expected, rising by 0.2 per cent on the previous month. Retailer Harvey Norman said sales were up by 0.5 per cent during November.

© 2008 The Age

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