Consumers suffer worst wealth loss since 1960
By Colin Brinsden, Economics Correspondent15 Apr 2009 5:56 PM
CANBERRA, April 15 AAP - Australia may face a recession less damaging than the one in the early 1990s, but so far households have suffered their worst loss of wealth in almost 50 years.
New data points to the economy deteriorating at a faster pace than in the previous recession, while a Reserve Bank of Australia (RBA) analyst says the global economy will only recover when the health of the banking system is restored.
Still, Westpac chief economist Bill Evans argues that greater pre-emptive policy action by the central bank and federal government than in the 1990s means this time around, a recession will be less damaging.
Consumers are feeling the pinch though, with wealth held in property, shares and other assets falling nearly 12 per cent in the past year - the worst performance since data was first complied in June 1960.
Analysing Treasury data released on Wednesday for the December quarter, Commonwealth Securities estimates the average Australian's wealth is just under $224,000, down over $24,000 from the record high set a year ago.
"The sharp decline in wealth levels have no doubt had an adverse impact on consumer sentiment and in turn spending levels have languished," CommSec economist Savanth Sebastian said.
Still, average wealth has nearly doubled over the past 10 years and signs are that when the March quarter findings are released later this year there will be some improvement.
"The improvement in house prices in the early months of 2009 and also the sharp pick-up in the share market over March should help support wealth," Mr Sebastian said.
The latest Westpac-Melbourne Institute leading index of economic activity showed annualised growth contracting by 5.1 per cent in February.
"For some months the index has been signalling that the Australian economy will enter a recession," Mr Evans said.
But he said deterioration in the index - which indicates the likely pace of economic activity in three to nine months - has been "truly remarkable" since first turning negative in October.
During the early 1990s recession the annualised growth rate of the index remained negative for 20 consecutive months, but took 12 months to reach a low point of minus 3.7 per cent.
The actual economic low point of the last recession was a contraction of 1.3 per cent in 1991, but Westpac is forecasting the low point as 1.0 per cent this year.
"Our current view is that, despite concerning signals from the leading index, that this current recession will be less damaging than the one in the early 1990s," Mr Evans said.
"That view is clearly supported by the much more pre-emptive monetary and fiscal policy approach which has been taken in this recession relative to the last one."
Still, global economic conditions are much more concerning this time around. The world economy grew 1.5 per cent in 1991, whereas Westpac expects a contraction of 1.0 per cent this year.
"It would be a mistake for the monetary and fiscal authorities to assume that enough work has been done given the extremely dangerous global economic environment," Mr Evans said.
The head of the RBA's financial stability department, Luci Ellis, said restoring the health of the banking system must take priority over longer term reforms if the global economy was to recover.
Measures by authorities to lower the level of risk on the balance sheets of financial institutions were necessary.
"Governments can buy the assets outright and place them in an entity separate to the bank, they can insure assets remaining on banks' balance sheets against losses, or they can invest in joint investment funds that buy the assets," Dr Ellis told a conference in Melbourne.l
"The important thing is that they are dealt with."
