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The Australian GDP for Q4 2008 has just been released.

The GDP for Q4 came weaker than expected.
Australian GDP Q4/(Annual):

GDP                             -0.5% / (0.3%)                            Consensus 0.2% /(1.2%)

In addition, Q3 2008 figure remained at 0.1%
We are halfway to a technical recession, defined as 2 consecutive quarters of negative GDP.

Economic Insights - Economics March 3 2009

The Reserve Bank today left the cash rate unchanged at 3.25 per cent. It was the first time in six meetings that the Reserve Bank had not cut rates.

 The decision to leave rates unchanged highlights the Reserve Bank’s confidence in Australian economic fundamentals.

We still believe that the Reserve Bank is pausing, rather than ending, its rate-cutting cycle. CommSec factors in another 50-75 basis point rate cut in April 2009, taking the cash rate down to a low of 2.50-2.75 per cent.

What does it all mean?

• Some may call this a courageous decision, some will see this as a sign of confidence in the Australian economy. But at some point the Reserve Bank had to pause in its record-breaking efforts to stimulate the economy. The Reserve Bank is confident that it has done enough to boost growth, especially with the added firepower of government spending and a weaker Australian dollar.

• The Reserve Bank has made it clear that it doesn’t want to win just the battle but rather the war. By keeping its powder dry today the Reserve Bank has plenty of ammunition to use if there is another, more dangerous downward leg to the global slowdown. A good soldier never uses all the ammunition available. And as events of the past 48 hours have shown us, the global economy is a long way from full health.

• If today’s move had to be summed up in one word, it is confidence. The Reserve Bank has confidence in Australia’s economic fundamentals and banking system. And by leaving rates unchanged the Reserve Bank is hoping to engender confidence. The biggest risk we face here in Australia is that of talking ourselves into recession.

• Unlike many investors and economists, the Reserve Bank has been paying attention to all the economic information, not just the gloomy readings. Over the past week figures have shown strong retail spending, record construction work, record business investment and a sharp rise in home sales. It is clear that rate cuts are working to lift the Australian economy and shake off the gloom from abroad.

• Not all Australians will support the decision to leave rates on hold. But the Reserve Bank has an impressive track record, steering the economy to 17 uninterrupted years of growth and it deserves our trust and respect.

• The Reserve Bank hasn’t closed the door to future rate cuts. The world is a scary place at present and further rate cuts may be necessary to insulate our economy. CommSec continues to pencil in a 50-75 basis point rate cut in April. The low-point for the cash rate is expected to be around 2.50-2.75 per cent.

• The Reserve Bank Governor has warned that at some point interest rate cuts don’t have the same positive effect on the economy. Super-low interest rates of 2 per cent and below would indicate to many that the economy is in dreadful shape, prompting them to cut, rather than lift, their spending and investment. Interest rate decision and past cycles

• The Reserve Bank has left the cash rate at a 45-year low of 3.25 per cent. The rate cuts of 25 basis points(bp) in September, 100bp in October, 75 bp in November, 100bp in December and 100bp in February represent the most aggressive easing cycle ever undertaken.

• The current cash rate of 3.25 per cent remains the lowest since February 1964 when the short term money market yield averaged 3.18 per cent.

• Before the September rate cut there had been twelve rate hikes in the cycle extending back over five years (since May 2002), the last occurring on March 4. Over that period, rates lifted 3 percentage points to 7.25 per cent.

• Just like 2000/01 there was a gap of six months between the last rate hike and first rate cut. In the 2001 rate cut cycle, rates were cut by 2 percentage points in the space of 11 months (to 4.25 per cent).

• In the prior 1996/97 rate cut cycle, cash rates were cut 2.5 percentage points in 12 months, followed by another 25 basis point move just over 16 months later. The low point for interest rates was 4.75 per cent.

Reaction: Sharemarket lifts; AUD rises, future rate cuts re-assessed

• The All Ordinaries index initially eased from 3165 just ahead of the decision to 3142, before rebounding to 3177 in late afternoon trade.

• The Australian dollar rose from near US63.40 cents to US64.08 cents in immediate reaction to the rate cut announcement before steadying near US63.90 cents.

• The overnight indexed swap market is now pricing in a cash rate of 2.75-3.00 per cent over the next four months. What are the implications for interest rates and investors?

• We are right behind the Reserve Bank in its decision to leave rates on hold. CommSec hopes that analysts will now start to take a more balanced approach in assessing each piece of economic data.

• Anyone that had been sitting on the sidelines, waiting for the opportunity to jump, will now start to get edgy. If rates have bottomed – or close to it – now is the time to be acting. It is possible that we will now see a wave of budding property owners and investors wading into the market.

• Budding property owners no doubt fear that if they drag their heels then the stock of unsold homes will dry up and prices will soar.

--Craig James, Chief Equities Economist, CommSec