Recession Hits Australia; 21st Monthly Decline in Construction; Service Sector in Contraction, New Orders Plunge; Ring, Ring Goes The Bell

A set of incredibly weak economic reports from down under have left me with in inescapable conclusion that Australia has entered recession.

Australia GDP Expands "Less Than Expected" .04% in 4th Quarter

The BBC reports Australia's economy expands 0.4% in the fourth-quarter

Australia's economy has expanded by less than expected in the fourth quarter of 2011, as business spending dropped, sending the dollar to a six-week low.

Gross domestic product rose by 0.4% in the three months to the end of December compared with the previous three months, said the Bureau of Statistics. Analysts were expecting growth of 0.8%.

However, most analysts say that growth is expected to pick up in the coming months. "We're doing much better than most," said Stephen Walters, from JP Morgan.

The Reserve Bank of Australia (RBA) said it still expects growth of 3-3.5% this year and next.

3.5% growth? What the heck are these guys smoking?

21st Monthly Decline in Construction

Bloomberg reports Australian Construction Index Falls to Lowest in Four Months

A gauge of Australia’s construction industry fell to the lowest level in four months as commercial construction remained weak and house building declined.

The construction performance index fell to 35.6 in February from 39.8 a month earlier, the 21st monthly decline, a survey by the Australian Industry Group and the Housing Industry Association released in Sydney today showed. A reading below 50 represents a contraction.

“The tentative signs of recovery that had emerged in the closing months of 2011 as interest rates were lowered appear to have dissipated since the start of this year,” Australian Industry Group Director of Public Policy Peter Burn said in a statement. “With new orders also weak in February and with market interest rates somewhat higher, the outlook for the next few months remains flat.”

Tentative signs of recovery? With construction dropping 21 straight months? Really?

Service Sector in Contraction

Markit reports Australia Service Sector in Falls in February.

Key Findings

• Service sector activity fell in February according to the latest seasonally adjusted Australian Industry Group/ Commonwealth Bank Australian Performance of Services Index (Australian PSI®) which was down 5.2 points to 46.7 in the month.
• And in three-month-moving-average terms, the Australian PSI® has remained below the critical 50 point level for four consecutive months.
• Reports of declining activity levels in February were common across the sector, with businesses reporting that sales, new orders and employment levels all fell back in the month.
• The new orders component of the Australian PSI® recorded a particularly sharp fall, and is now at its lowest level in over 12 months.
• In line with these soft trading conditions, the average selling price index declined in February, and is also at its lowest level in over 12 months.

New orders

• On a seasonally adjusted basis, new order levels fell sharply in February after remaining broadly steady over much of the past year.
• The new orders component of the Australian PSI® fell by 8.5 points to 45.6.
• New order levels declined across most service sub-sectors in February, with particularly sharp declines reported in the retail trade and communication services sub-sectors.
• This was only partly offset by solid growth in new orders in the finance & insurance and personal & recreational services sub-sectors.

Australia PSI

click on chart for sharper image

Huge Price Squeeze

Please take a good look at that chart. Wages have risen 31 months. Input prices have risen 108 consecutive months!

Every other component of the PSI is in contraction. Selling prices have fallen for 3 months while new orders have plunged.

Trendline Growth

For another look at GDP growth in Australia, please consider The Australian economy is not growing at trend

The outcome over 5 years? Trend growth at 0.72% per annum, with peak to trough and current total growth as marked on the chart.

Over the last 12 months, yearly GDP per capita growth was at 0.7% - substantially less than the long term rate of 1.48% over the last ten years, or the 2.4% rate over the whole data series.

The Australian economy is still growing, but at half the long term pace on a person by person basis, and given the problems with the standard CPI measurement (which contrary to popular belief, does not measure inflation), it is likely that purchasing power is not being maintained either.

With a government forced to return to surplus to maintain its AAA rating and thus reduce stimulus spending, credit growth running at 35 year lows and decelerating, a slowdown and likely reversal in Terms of Trade from record high commodity prices and in the absence of further Chinese stimulus (which arguably did more than all the endogenous stimuli post GFC), its hard to see how GDP growth can return to the mean trend of pre-GFC years.

It’s also hard to see how this is surprising.

Ring, Ring Goes The Bell

Indeed, it's not surprising (to a few of us anyway).

Yesterday I stated Australia Retail and Housing Bloodbath Coming Up.

Today I am ringing the bells of recession.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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