Treasury chief Ken Henry is confident Australia can avoid slipping into recession, a prediction backed by finance minister Lindsay Tanner.
But concerns over the impact of the global financial crisis are continuing to dampen the spirits of consumers, and economists are confident the Reserve Bank of Australia (RBA) will have to slash interest rates further.
Henry said he was as confident as he could possibly be that the Australian economy would avoid slipping into negative growth.
“We’re trying our hardest to make sure that happens, that we do avoid a quarter of negative growth,” Henry said during an address to the National Press Club on Wednesday.
Recessions are typically characterised by two consecutive quarters of contraction.
Both Treasury and the RBA have revised down their growth forecasts.
Treasury has tipped annual gross domestic product growth to fall to two per cent for 2008-09, while the central bank has revised down its forecast to 1.5 per cent.
Henry said the RBA was working hard on this by cutting the cash rate by 200 basis points since the start of September, most of which had flowed through to people with mortgages.
He said corporate profitability remained high, unemployment was low, and there was a large pipeline of investment in the engineering, construction and resources sectors.
On top of that, stimulus action taken by various governments would buoy the economy.
“Dramatic action has been taken and is likely to be taken globally, and when added to the actions that have been taken domestically … (it) gives one reason to be confident that Australia can indeed avoid a negative quarter of growth,” Henry said.
Tanner agreed that a recession could be avoided, adding, however, that Australia would be influenced by the actions of other countries in fighting the global crisis.
He said China’s massive stimulus package would be a “very, very powerful factor” working against a recession.
“There are things that are yet to be determined in countries like the United States, particularly this new administration that I believe will have a powerful positive stimulus as well,” he told Sky News.
“So we can’t really predict how strong those negative influences are going to be … (but) I believe we can avoid recession.”
Still, the rate cuts handed down by the RBA so far, and the government’s A$10.4 billion stimulus package have prompted only a minor boost in consumer confidence.
The Westpac-Melbourne Institute monthly survey shows consumer confidence rose by 4.3 per cent in November, but is still 22.6 per cent below the level of a year before.
At an index level of 85.5, confidence remains well below the key 100-point level that divides optimists and pessimists.
“The current level of the index is slightly above three other reads this year, but (those confidence levels are) the lowest read of the index since 1992,” Westpac chief economist Bill Evans said.
“Households have been unsettled by the ongoing disturbances in financial markets associated with the global credit crisis.”
Other data released today showed wages growth remains contained, which will be a comfort to a central bank that is cutting interest rates at a rapid pace.
The wage price index for the September quarter – the RBA’s preferred measure of wages growth – rose by a seasonally adjusted 0.9 per cent, keeping the annual rate at 4.1 per cent.
This is comfortably within the RBA’s perceived line in the sand of 4.5 per cent.
