Path to recovery still uncertain
    Australia’s economic prospects have continued to deteriorate as a result of the global slump, and
    we stick to our long-held belief that it will have entered recession in Q109. While the economy will
     receive a boost from the wide range of policy measures – both monetary and fiscal – these are  
     unlikely to prevent it from slipping into a more prolonged period of downturn. The slowdown will be
     led by falling rates of private consumption growth and investment, while low commodities prices
    will continue to have an adverse effect on the country’s terms of trade. In light of these dynamics,
    we reiterate our 2009 and 2010 real GDP growth forecasts of -1.% and 1.2%, and now foresee
     growth setting in at an average pace of 2.% in the years thereafter.
     On the political front, the sharp deterioration of economic conditions means that policymakers are
    facing a difficult year. One of the main challenges will be containing the rise of unemployment,  
    which has accelerated markedly since Q308 and is likely to continue doing so in the coming 18
     months. While the Rudd administration has already adopted a series of spending measures to
     support the economy, these will contribute to a considerable fiscal deficit, leaving him open to  
     accusations of mismanagement. The government is also facing pressure to press ahead with its
     environmental agenda, including the contentious carbon trading scheme which has yet to make
     it through parliament.
    After cutting interest rates by a total of 2bps in the six months to February 2009, we expect the
     Reserve Bank of Australia (RBA) to trim another 50bps from the official cash rate, which would  
    take it to a new record low of 2.0%. Coupled with the Treasury’s spending plans unveiled in the
     FY2009/10 budget, the reductions should provide some boost to domestic demand, but probably
     less than the authorities are hoping. On the other hand, lower rates will relieve some pressure
     off Australia’s households and corporations, both of which are highly indebted by international
     standards.
    While Australia benefits from a strong business environment, its policy on inward investment is  
     likely to be a flashpoint in the coming months as slumping commodity prices and a depreciating  
     exchange rate leave Australian firms vulnerable to foreign acquisition. Recent investment propos-
     als by foreign – and specifically Chinese – firms into the resource extraction sector have resulted  
     in widespread calls for protectionism, with government rulings still pending in some of the biggest
     cases. While we do not expect a dramatic shift in the country’s business environment, we caution
    that local regulators may become more active in blocking deals that are perceived to be against
    the national interest, which itself has become somewhat nebulous.