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Impact of US Recession on Australia

08 Mar 08 / Posted by: Alex

$181 billion lost on Australian market in 2008 (Even more now! 23/8/08)

Almost $65 billion wiped off super funds (Even more now! 23/8/08)

Since November, the index has shed 18% (Even more now! 23/8/08)

With the Australian stock market on its biggest losing run in a decade and talk of a possible US recession, the question being asked is: What is a recession and how will a recession affect me?

The question is timely, with the country now about to face a turning point when it comes to its economic future; as more and more consumers gradually become aware about how and where they should invest their money.

Superannuation? The stock market? The property market? Ostriches? Or low risk run-of-the-mill savings accounts?

Have Your Say;

Are you worried about a possible US recession?

Prior to the election of Prime Minister Kevin Rudd, the Mid Year Economic Review, a government economic report card, upgraded the country’s economic growth forecast for financial year 2007-08 from 3.75 per cent to 4.25 per cent, thanks to solid gains in the mining sector. However for 2008 analysts believe America’s woes will affect the local economy, scaling back growth rate from 3.9 per cent to 3.6 per cent.

Hubb Financial’s Andrew Page says all the signs are pointing to the red for the US.

“The performance of the Australian and International markets really signal that a US recession is expected by investors”, Mr Page told World News Australia online.

Australian Recession exposure from US

Key factors that will indicate the health of the economy include exchange rates, unemployment, inflation and of course interest rates.

If we were to chart Australia’s interest rates on graph, it would reveal a slow incline from 5.5 per cent in January 2006, to 6.75 per cent in January 2008, a total of seven increases in almost 24 months.

All signs point towards the economy being in overdrive; unemployment is at an all time low (4.3 per cent in December last year) while our dollar remains relatively competitive when compared with the US greenback.

Earlier this month, the country’s four biggest commercial banks (Commonwealth, ANZ, Westpac and National Australia Bank) hiked up their variable rate ahead of any announcement by the Reserve Bank of Australia (RBA), the first time in decades a commercial bank has jumped the gun ahead of the country’s central bank.

The reason behind the rise was no other than the bank’s direct involvement with the failing US sub prime market.

CBA chief financial officer David Craig said the bank had been exposed to additional funding costs of about $100 million since the start of the credit crisis.

“The impact of the cost of the wholesale fund is something that is impacting all Australian banks,” Mr Craig said in a statement.

Will a US recession affect me?

While the fall out from the US is affecting Australian banks, will it affect Australian consumers?

To the average Joe, all signs point towards yes.

However Andrew Page seems a bit more optimistic.

“The Australian economy actually remains quite sound fundamentally. In fact Access Economics recently forecast GDP growth of around four per cent for 2008 – which is a very strong figure. The worry is that if the US economy slows down, it will impact other country’s like China, which will in turn impact us here at home. This is called the contagion effect”, Mr Page says.

He says consumers should be sensible with their debt, cutting back on any non-essential spending, “that way they will be better placed to weather any impact we do see from a US slowdown”.

However should a recession hit the US, it could mean good news for Australia’s inflation.

“A US recession, if anything, is likely to result in lower consumer spending and lower risk tolerance among investors. This may actually act to lower inflation. Given that inflation is a primary concern for central banks around the world, this is not a bad things”, Mr Page says.

Tax cuts to ease recession problems

Meanwhile with the possibility of more tax cuts on the way following the PM’s ambitious budget surplus plans, investors, consumers and even business are weighing up their options when it comes to the US influence down under.

“The PM is actually trying to encourage people to save or invest more in things like super. And this will help Australian families withstand any negative US influence”, says Mr Page.

“If however people simply spend the extra money, it could add extra inflationary pressure and that’s going to put upward pressure on interest rates”.

Super lost with Recession fears

It’s obvious a lot of Australian-based super funds have a portion of their money tied up in the US market, putting their customers at a higher risk of losing a small percentage of their nest egg.

Some analysts believe retirees and potential retirees should ride out the storm and not make any impulsive decisions.

“The best thing for retirees to do is to not panic. Markets are volatile, but they have always gone up over the long term (there is no ten year period in history where the market has lost ground)”, says Mr Page.

Is the US heading for Recession?

If we look at the latest developments in banks and political moves, one could gather there are definitely tough times ahead in the US economy.

On Saturday US President George Bush announced his rescue package calling for a package of tax cuts and other measures totalling about $US140 billion ($A159.92 billion) to shore up the fragile US economy.

“This growth package must be temporary and take effect right away so we can get help to our economy when it needs it most,” said President Bush.

It’s clear the urgency of Mr Bush’s initiative must have shaken some investors, as their reaction was ‘too little, too late’.

However Access Economics, today says the world will post yet another year of good growth in 2008.

“But the risks are rising fast – we don’t forecast a US recession, but one is quite possible, and both Japan and Europe have the wobbles”, says the report.

Meanwhile the report indicates all eyes should be on Australia’s dependence on China, saying “its strength looks set to underwrite a notable lift in coal and iron ore prices”.