Stevens Says Australia, in Recession, Is Well Placed

(Bloomberg) -- Australia is well placed to rebound from its first recession since 1991 because the financial system is strong, government finances are sound and companies will benefit from a pickup in China, Reserve Bank Governor Glenn Stevens said.

“There remain good grounds to think that we will continue to weather the storm better than most,” Stevens said in a speech in Adelaide today. The job of policy makers is to “foster, rather than erode, confidence. Over the past six months, that has involved the rapid deployment of both fiscal and monetary measures, to support demand.”

The Reserve Bank of Australia has cut its benchmark interest rate by a record 4.25 percentage points since early September to a 49-year low of 3 percent and the government has pledged almost A$90 billion ($63 billion) in grants, spending and bond-market assistance to boost an economy that contracted in the fourth quarter for the first time since 2000.

“The effects of those measures will still be coming through for some time yet,” Stevens told company directors in his speech entitled “The Road to Recovery.”

The Australian dollar fell to 70.12 U.S. cents at 1:38 p.m. in Sydney from 70.19 cents just before the speech was released. The two-year government bond yield fell 1 basis point to 3.18 percent. A basis point is 0.01 percentage point.

Australian Recession

Policy makers cut borrowing costs two weeks ago because rising unemployment and weaker-than-expected domestic demand increases the likelihood inflation will slow, according to minutes of the bank’s April 7 meeting released today in Sydney.

“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,” Stevens said.

Stevens’ comments echo those of Prime Minister Kevin Rudd, who for the first time yesterday said that a recession in Australia is inevitable amid a slump in global growth.

“The challenge for the government is to cushion the impact of the recession on business and jobs,” Rudd said.

Australia’s unemployment rate rose by the most in 18 years in March, climbing to 5.7 percent from 5.2 percent in February. The number of people employed dropped 34,700. Miners Rio Tinto Group, BHP Billiton Ltd. and Iluka Resources Ltd. are among companies firing workers as the global recession saps demand for raw materials.

Global Comparisons

“The Australian economy has been contracting, though on the best information we have, not at the pace seen in a number of other countries,” Stevens said. Consumer confidence is “much more resilient to date than comparable results in major countries,” he added.

Australia’s gross domestic product declined 0.5 percent in Australia from the previous three months, a report showed on March 4. By contrast, the U.S. and U.K. economies both shrank 1.6 percent. Japan contracted 3.2 percent.

In Australia, “public finances remain in very sound shape, with modest debt levels and a medium-term path for the budget back towards balance,” Stevens said. “Without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, the financial regulatory system is strong and tested.”

Treasurer Wayne Swan will release the annual budget on May 12 and has said it will be in deficit for the first time in seven years.

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