Signs Australia is in danger of falling into a recession as Reserve Bank cuts interest rates to 1%

The recession you have when you’re not in a recession: Australia is staring down a deep black hole as the government runs out of options to kickstart the economy

  • Australia hasn’t been in a recession since 1991 but there are key signs of distress
  • Passenger vehicle sales in June 2019 have dived by 18.5 per cent in one year 
  • Building approvals have plummeted by 19.6 per cent during the same period 
  • The Reserve Bank of Australia has cut interest rates to a new record low of 1%
  • Central bank chief Philip Lowe admitted there were limits to what he could do 

Australia’s economy is growing at the slowest pace since the global financial crisis a decade ago despite interest rates being at a record low of just one per cent.

While Australia hasn’t been in a technical recession since 1991, key barometers of economic activity are showing signs of distress. 

Passenger car sales and building approvals are in dire straits with both measures plunging by 20 per cent in one year. 

Australia is now just four cuts away from having an unprecedented zero cash rate, and Reserve Bank Governor Philip Lowe has warned there was only so much he could do to kickstart the economy. 

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Australia’s economy is growing at the slowest pace since the global financial crisis a decade ago despite interest rates being at a record low of just one per cent. Building approvals have dived by 19.6 per cent in one year (pictured is construction activity in Sydney) 

‘There are some downsides to monetary easing,’ Dr Lowe told a community dinner in Darwin on Tuesday night. 

SIGNS OF ECONOMIC DISTRESS

Australia’s economy grew by 1.8 per cent in the year to March, the slowest annual pace since September 2009.

Since then, the Reserve Bank of Australia has cut interest rates twice – in June and July – taking the cash rate to a record low of one per cent.

Key indicators show an economy in distress.

Passenger car sales dived by 18.5 per cent in the year to June.

Building approvals in May were 19.6 per cent weaker compared with a year earlier.

Sources: Australian Bureau of Statistics, Federal Chamber of Automotive Industries 

‘We have options other than monetary easing for putting us on a better path.’

He made the comments hours after interest rates were cut by a quarter of a percentage point to just one per cent, the lowest since the Reserve Bank of Australia was established in 1959.

Dr Lowe and the RBA board cited concerns about weak consumer spending, low wages growth and declining house prices. 

On Wednesday, the Federal Chamber of Automotive Industries revealed vehicle sales had suffered the biggest annual decline in almost a decade.

Passenger car sales plummeted by 18.5 per cent in one year as overall vehicle sales dropped by an annual pace 9.6 per cent in June 2019.

Building approvals in May plunged by 19.6 per cent compared with a year earlier, new Australian Bureau of Statistics data showed. 

With interest rates already at a record low, Dr Lowe called on the federal government to spend more on infrastructure in a bid to boost economic activity. 

Passenger car sales plummeted by 18.5 per cent in one year as overall vehicle sales dropped by an annual pace 9.6 per cent in June 2019 (pictured is a Toyota dealership in Sydney)

Passenger car sales plummeted by 18.5 per cent in one year as overall vehicle sales dropped by an annual pace 9.6 per cent in June 2019 (pictured is a Toyota dealership in Sydney) 

‘One option is fiscal support, including through spending on infrastructure,’ he said.

‘This spending not only adds to demand in the economy but provided the right projects are selected – it adds to the country’s productive capacity.’ 

Following the latest interest rate cut, ANZ was the only major bank to pass on in full the RBA’s 25 basis point rate cut, taking its standard variable rate to 4.93 per cent.

The Commonwealth Bank reduced its standard variable rate for principal and interest by 19 basis points to 4.93 per cent.

National Australia Bank also cut its equivalent loans rate by 19 basis points to 4.92 per cent.

Westpac, meanwhile, trimmed its home loan rate by 20 basis points to 4.98 per cent.

Reserve Bank Governor Philip Lowe: 'There are downsides to monetary policy easing'

Reserve Bank Governor Philip Lowe: ‘There are downsides to monetary policy easing’

Australia’s economy grew by just 1.8 per cent in the year to March, the slowest pace of annual expansion since September 2009 during the global financial crisis.

Since that time, the RBA has cut interest rates twice, in June and July.

A one per cent cash rate means that if rates were cut four more times, Australia would have zero interest rates.

It would be in a situation known as quantitative easing, where the central bank effectively prints money by buying government bonds to boost money supply.

The United States, the European Union and Japan have been in this situation.  

JPMorgan is expecting the RBA to cut rates two more times by mid-2020, which would take the cash rate to just half a percent. 

Despite that, the American investment bank’s chief economist in Australia Sally Auld was optimistic the economy would avoid recession.

‘Well, fundamentally, we’re not forecasting recession at JPMorgan and the RBA has a reasonably optimistic set of forecasts, where they think the economy will get back to trend rates of growth in 2020,’ she told the ABC’s 7.30 program on Tuesday.

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