US car sector chaos will hit Australia, shares steady: Economy roundup

After a month of steady sharemarket gains, investors were given a jolt last night after the shocking state of the car sector in the United States was laid bare.

In a dramatic day, US President Barack Obama forced the resignation of General Motors chief executive Rick Wagoner, told Chrysler to merge and threatened both companies with bankruptcy.

Obama’s White House task force charged with leading the automotive revival has rejected GM and Chrysler’s restructuring plans and pleas for billions in funding.

Instead, GM will get funds to keep operating for 60 days, but the $US30 billion in new loans it is seeking will be put on hold until the company reworks its restructuring plan.

Chrysler, which is controlled by Cerberus Capital Management, was told to complete a planned merger with Italian auto company Fiat within 30 days or risk liquidation.

But Obama has declared the US Government is not interested in running GM.

“What we are interested in is giving GM an opportunity to finally make those much needed changes that will let them emerge from this crisis a stronger and more competitive company,” Obama said.

“We cannot, we must not, and we will not let our auto industry simply vanish. But we also cannot continue to excuse poor decisions.”

If one of the auto giants collapses, the ramifications will be felt around the world. The car companies are huge global employers and their manufacturing operations underpin thousands of vehicle-parts companies around the world.

The shock of the collapse of an iconic company such as GM or Chrysler would also send shockwaves through investment markets.

GM’s Australian subsidiary, GM Holden, says it is monitoring events in the US closely, amid rumours the local operation is considering a major restructuring plan that may result in large job losses.

Shares flat

Wall Street was spooked by the problems at GM and Chrysler, with the Dow Jones Industrial Average falling 3.3% on worries about the auto and banking industries.

Not surprisingly, the Australian sharemarket fell around 1% in early trade, before recovering. The benchmark S&P/ASX 200 was down 15 points or 0.4% to 3588.80 at 12:10 AESDT.

National Australia Bank fell 2.2%, financial services firm AMP fell 2.1% and News Corp shed 2.2%.

The biggest winner was Babcock & Brown Infrastructure, which gained 9.1%.

RBA executive says China may have bottomed

Meanwhile, RBA Deputy Governor Ric Battellino has used a speech in Brisbane to say that Australia’s gross domestic product is likely to fall in 2009.

“The reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world. As such, GDP is expected to fall in 2009,” Battellino told the Urban Development Institute of Australia.

But he was more positive about the Chinese economy. He says the Chinese authorities were caught by surprise by the suddenness of the downturn, but had reacted with great speed and vigour in implementing monetary and fiscal measures to stimulate their economy.