ECB to cut rates sharply

November 5, 2008

, SYDNEY, November  5 – The global financial crisis will cut Australia\’s economic growth, slash billions of dollars off the budget surplus and increase unemployment, the government said Wednesday.

Forecast gross domestic product growth for this financial year has been cut to 2.0 percent from 2.75 percent, the government said in its mid-year economic and fiscal outlook report.

The 2009/10 GDP growth forecast has also been revised downwards — to 2.25 percent from 3.0 percent.

The surplus of 21.7 billion dollars (15.2 billion US) forecast in the May budget for the current year has been slashed to just 5.4 billion dollars.

"The global financial crisis has smashed a 40-billion-dollar hole in the budget," Treasurer Wayne Swan told a news conference.

The government expects the fall-out from the global downturn to result in a dramatic drop in tax receipts over the next four years.

The impact is also expected to cut the 2009/10 budget surplus from an earlier forecast of 19.7 billion dollars to just 3.6 billion.

And the unemployment rate is expected to rise to 5.0 percent by June next year, from a previous forecast of 4.75 percent, and to 5.75 percent by June 2010.

"There\’s no point in trying to sugar-coat these figures," Swan said, warning there could be more bad news ahead if global conditions deteriorated further.

But Swan insisted Australia compared favourably to other nations that were already in recession, noting that the government was still forecasting modest growth and modest surpluses.

"While Australia is clearly not immune from the effects of the global financial crisis and the global downturn, we are better placed than most other countries to withstand the fallout," he said.

However, some analysts saw the government\’s revised figures as overly optimistic as hopes fade that the country will be relatively unscathed by the turmoil because of its strong commodity exports to China.

ANZ senior economist Katie Dean said the government seemed to have taken a conservative approach in downgrading the terms of trade outlook for 2008-09.

"It does mean their nominal GDP forecasts haven\’t been downgraded to the extent to which probably other forecasters have," she said, adding it will be "quite a challenge" for the forecast budget surplus to be met.

A major hurdle would be the bulk ore negotiations between Australian miners and their Asian customers in coming months, analysts told Dow Jones Newswires.

The global slowdown and stockpiling by Chinese steelmakers is expected to mean sharply lower prices for iron ore next year, cutting the government\’s corporate tax receipts.

"The contract negotiations are under way but at this stage the indications don\’t look good for export prices next year," said ABN AMRO chief economist Kieran Davies.

Despite slower growth, the consumer price index is forecast to rise at a slightly faster pace of 3.5 percent in the second quarter of 2009 from a year earlier, up from a May budget forecast of 3.25 percent.

The government\’s revised figures were described as "worrying" by the Australian Industry Group, which represents 10,000 employers across the country.

"Clearly the government\’s capacity to make investments with long-term paybacks is going to be more restricted while the need to shore-up growth and employment in the short term will demand a lot of resources and executive attention," chief executive Heather Ridout said in a statement.

The Australian Chamber of Commerce and Industry said it was "particularly concerned about the outlook for business investment and the consequent impact on employment during 2009."

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