Global recession sets the tone: Westpac Regional Economic Report
20 February, 2009
The current backdrop for the Australian economy, including the regions, the farm sector and global rural commodity markets, is particularly challenging, according to the latest Westpac Regional Economic Report, released today.
"Australia is being hit by what is shaping up to be the weakest year of world growth in at least sixty years. The impact is being felt across the states, including the once booming resource rich states of Western Australia and Queensland. The regions throughout Australia will also feel the fallout," Westpac Senior Economist, Andrew Hanlan, said.
"Economic downturns do not last forever of course. So the debate turns to the likely speed and magnitude of the world recovery. We see the risks to the downside of the IMF and consensus view. This global recession was triggered by a banking crisis and will require significant balance sheet repair. By its very nature, balance sheet repair takes time.
"The risk of a more protracted global recession and muted initial rebound is critically important to the outlook for the Australian economy and to global commodity markets. If, as we expect, international demand remains weaker for longer, then expectations of a recovery in markets will be met with disappointment in the early stages."
Mr Hanlan said commodity prices generally fell sharply late in 2008 in response to the weakening demand environment and as a massive deleveraging of commodity markets unfolded.
"A positive in this cycle is that commodity prices in many cases are still above historic averages. Also, the sharp fall in the Australian dollar has cushioned the downturn.
Mr Hanlan said that, encouragingly, prices of a number of rural commodities have stabilised, or even rebounded a little since November. However, the weak demand environment suggests this will prove to be a temporary rebound.
"A recovery in commodity prices will emerge, but not just yet in our view," he said.
"Price movements have varied across the rural commodities. Supply tightness is a mitigating factor in the sugar and lamb markets. For some commodities, demand is more income sensitive, such as for cotton and wool."
Mr Hanlan said government intervention in rural commodity markets was another theme of the report.
"Intervention comes in various guises and hence the price impact varies. In the dairy market, subsidies are sending prices even lower, while government buying of cotton is supporting prices for now - but setting the scene for downward price pressure down the track. Also, activist policies boosting ethanol usage is supporting sugar prices," he concluded.
