Deficit around the corner, business spending slumps, China cuts interest rates: Economy roundup

The Federal Government will let the budget fall into deficit, while not ruling out providing further stimulus if the economy continues to deteriorate.

The Federal Government will let the budget fall into deficit, while not ruling out providing further stimulus if the economy continues to deteriorate.

For the first time yesterday, the Government admitted it may not maintain a budget surplus, with Prime Minister Kevin Rudd saying a “temporary deficit” will occur if global economic conditions deteriorate.

“If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that the Australian Government revenues will reduce further,” he said in Parliament yesterday.

“Under those circumstances it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in our future infrastructure.”

The announcement comes following several different GDP growth forecasts. In October, the Reserve Bank cut the GDP growth figure for 2008 from 2% to 1.5%. For the year ending June 2009, it now forecasts 1.5% expansion, down from 2.25%.

The deficit could result further stimulus packages. Speaking on ABC Radio this morning, Treasurer Wayne Swan says it would “irresponsible” to rule out a temporary deficit, which may come in the form of further stimulus.

Spending slump

Further stimulus may be necessary, as new Bureau of Statistics data shows business spending slumped in the September quarter. New capital expenditure slowed to just a 0.6% increase, down from a revised 7.4% rise in the June quarter.

The biggest drop was in equipment, plant and machinery, which fell 2.4% on the back of a 10.1% drop in investment for the mining sector.

The falls continue, with the index of skilled job vacancies falling a seasonally adjusted 11.9% from October – a 38.3% drop from the same time last year.

Employment Department figures show drops in three occupational groups – professionals down by 3.4%, associate professions down 5.7%, and trades down 5.3%.

Sharemarket up

But despite the disappointing figures, the Australian sharemarket has rallied after yesterday’s 2.3% decline, rising 3% in early trade. The benchmark S&P/ASX200 index was up 61.9 points or 1.75% to 3601.9 at 12.10 AEDT.

BHP shares rose 5.7% to $28.80, with AMP rising 2.9% to $5.40. Commonwealth Bank shares also jumped 1.7% to $33.23.

China reduces interest rates again

Meanwhile, China has announced the biggest official interest rate cut in 11 years, dropping the official cash rate to 5.58%, in an attempt to stimulate the economy.

The World Bank has cut its forecast for China’s 2009 growth from 9.2% to 7.5% – the lowest level since 1990.

“This is the most aggressive monetary easing in recent years and should bode well for China’s market performance,” says Jing Ulrich, chairwoman of China equities for JPMorgan in a client report.