R-word shadows cash rate cut

By GREG ANSLEY

CANBERRA - The Australian Reserve Bank yesterday pruned cash rates by a further 0.25 percentage points as new GDP figures raised fears that the nation may be slipping towards recession.

The rate cut, which was rapidly passed to mortgages, credit cards and business loans by lenders, follows last month's 50-point reduction and pushed the official rate down to 5.5 per cent.

But while the easing was welcomed by business and such key sectors as the battered housing industry, the December quarter national accounts released by the Bureau of Statistics shortly after the bank's announcement confirmed earlier predictions of a sharp slide in Australia's economic performance.

GDP fell by 0.6 per cent in the fourth quarter - the first decline since the recession of the early 1990s and slowing year-on-year growth to 2.1 per cent.

Prime Minister John Howard and Treasurer Peter Costello played down the significance of the figures and pointed to indications of a strengthening of the economy later in the year.

Mr Costello said the impact of world oil price rises had been greater than expected.

He said there were no serious imbalances in the economy and the signs were positive for exports and a turning point in dwelling investment.

But Australian Chamber of Commerce and Industry chief economist Dr Steven Kates said the December quarter figures were disturbing and showed that the latest cut in interest rates was far too little and much too late.

"Gone are the 14 consecutive quarters of 4 per cent or better annual growth," he said.

"Just over a year ago we called the intention to raise rates an act of vandalism. Now, only 15 months later, our worst fears have come to pass."

Housing Industry Association managing director Dr Ron Silberberg said worse was to come.

He said the association's forecasts suggested this financial year would be one of the industry's leanest on record, with a $A10 billion ($11.9 billion) drop in work done over the year and up to 140,000 jobs lost directly and indirectly in the sector.

The Reserve Bank's reduction of official interest rates was timely, but recent softness in building approvals was still of great concern and pointed to a very slow recovery.

The Reserve Bank said its decision to ease rates had followed a marked softening of the economy in the past two months - pushed by a one-off GST impact on construction, declining business confidence and a further deterioration in the global economy.

The slowdown was shown in the December quarter national accounts, with falling household consumption, declining new car sales, a 15.4 per cent slump in housing, a 5.5 per cent dip in new plant and Machinery investment and a 9 per cent slide in private non-financial sector corporate profits.

The accounts added to concern caused by a run of gloomy figures, including Ford's decision to lay off 300 workers.

In itself, the Australian cut is unlikely to have any direct influence on Reserve Bank Governor Dr Don Brash, who is due to issue his next monetary policy statement on Wednesday.

But, the underlying problem the Australians are trying to counter - the rapid slowdown in their economy - will be among the factors on the rate cut side of the ledger when Dr Brash makes his decision.