Aussie economy tipped to bounce back quickly

Australia's economy may rebound faster than the central bank forecast six months ago as consumer and business confidence surges, Reserve Bank Governor Glenn Stevens said.

It appears "that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries," Stevens said in Sydney.

"We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six months ago."

Stevens left the benchmark lending rate at 3 per cent on July 7 for a third month amid signs the lowest borrowing costs in half a century and government spending helped the nation skirt a recession. He said yesterday Australian banks should reduce their reliance on government guarantees introduced at the height of the global financial crisis last year.

"The banks of the United States and Europe are starting down this path on their wholesale issuance, having recognised that it is in their own interests to do so," Stevens told a function organised by the Australian Business Economists.

"It would make sense for Australian banks, which have accounted for 10 per cent of global issuance of government-guaranteed bank debt over the past nine months, to step up their efforts to do likewise."

Signs of a rebound in Australia's economy, which grew 0.4 per cent in the first quarter after shrinking 0.6 per cent in the fourth quarter, may prompt the central bank to revise its forecast for gross domestic product on August 7. In May, the bank predicted GDP would contract 1 per cent this year before expanding 2 per cent in 2010.

"It is becoming more common for Australians to see the glass as half full than as half empty," Stevens said.

Resilient household spending is a key reason Australia's economy avoided recession after Stevens cut the overnight cash rate target by a record 4.25 percentage points between September and April and the Government distributed A$12 billion ($15 billion) in cash to low and middle-income consumers.

While the use of government guarantees on bank deposits, as well as monetary and fiscal policy, helped support domestic demand and confidence during the "period of maximum global economic contraction", it would be a mistake to "lapse into the comfortable assumption that easy prosperity will come our way", Stevens said. .

Stevens also said Australia continues to face risks caused by the combination since the mid-1990s of increased household debt, lower savings rates and higher asset prices.

Another challenge will be to ensure that the "ready availability and low cost of housing finance" results in the construction of more houses, and "not just higher prices", Stevens said.

Recent reports show home-loan approvals to buy houses and apartments climbed 2.2 per cent in May, the eighth straight month of gains. By contrast home-building approvals tumbled 12.5 per cent, the first decline in four months.

Stevens also said while the emergence of China's economy would continue to offer opportunities for Australia, the world's biggest exporter of iron ore, the nation was "more exposed to the consequences of what might go wrong" in China. Bloomberg