Australia Reviews

The month of October continues to shatter economies around the world, or rather the events of September and the 15 months leading up to it, continue to do so.

The failure of Lehman Brothers and the spate of rescues in the US and Europe in the last two and a bit weeks of September, should now be seen as the major dislocation of the credit crunch, which started as the US subprime mortgage debacle.

Not even the outbreak of the crunch in August 2007, nor the bailout of Bear Stearns in March of this year, have come close to causing the global economy, and its constituent economies around the world, the same sort of devastating blow.

Bear Stearns was a warning, but the Fed and JPMorgan pulled us through, but no one thought that when Lehman Brothers was tottering, that it would go. But go it did, down the tube to devastate financial markets, confidence and set off a chain reaction of events still clanging their way through financial markets.

US retail sales, new home starts and new home building permits all down by a record amount, or to record lows in October; US unemployment soared 254,000 (to be revised upwards) and still thousands of jobs are going every day across the US, and increasingly in Australia and Europe and parts of Asia.

Now Japan, which is already in recession, with two consecutive quarters of mild contractionary activity, faces a more damaging slump.

The engine for the country is its export machine, allied with the huge domestic manufacturing sector set up to arm and replenish the Toyotas, Nissans, Hondas, Canons, Fujitsus and other industrial giants.

If the engine splutters, the Japanese economy backfires: it’s what has been happening at increasing pace since mid year: a fall in August, a small recovery in September, and now the worst slump in almost seven years.

The Japanese Finance Ministry reported yesterday that exports fell 7.7% in October from October 2007.

That was the biggest drop since December 2001 as the US recession was deepening.

That was after a rise of 1.5% in September.

It follows the first effective deficit in 26 years, which was logged in August this year, when the economy was hit by high import prices and weak demand for Japanese goods overseas.The October figures were the first deficit for the month in 28 years, reflecting a fall in exports to the rest of Asia.

Shipments to China, which had supported demand even as shipments to the US and Europe had declined, fell 0.9%, marking the first decline since May, 2005.

Exports to the US and Europe posted double-digit declines year-on-year.

Slumping car exports, shipments of consumer electronics, industrial foods, trucks, computers: a wide range of products have been hit by the slump in the US and European economies in particular.

On top of this, the rising yen continued to hurt exports: it’s risen 22% against the euro since September and around 9% against the US dollar in the past couple of weeks.

Although the slump in US car sales is hurting, so too is falling demand in Japan, and in other markets.

That’s why Toyota is expecting to earn at best $US200 million in profits in the six months to next March (but that now looks like a loss). Nissan this week said its second half profit would be eliminated by the slump in the US and the higher yen.

Growth in China, Japan’s largest trading partner, is slowing (hence the huge reflation package revealed last week and three rate cuts in two months).

So it shouldn’t have been a surprise that the level of exports to China fell for the first time in three years, or that exports to Asia as whole fell 4% in the month.

Shipments to Europe plunged 17.2%, the biggest fall since December 2001 and by 19% to the US (although they were down 22.8% in August).

Imports rose 7.4% (despite the higher value of the yen and the continuing fall in oil prices).

That gave Japan a $US666 million trade deficit, the third this year, a rare event for the export machine.

According to the economics teams at three leading investment banks, the Australian economy is slumping right now and will continue to worsen well into 2009 at a rate lower than the forecasts from Treasury and The Reserve Bank.

The economics teams at Goldman Sachs JBWere and Merrill Lynch have slashed their estimates of 2008 and 2009 economic growth for Australia and are now predicting recession.

And ABN Amro reckons the economy is stalling right now and growth is close to zero.

They all agree that as a result the Federal budget will go into deficit, unemployment will rise to 7.5%, and the Reserve Bank will cut interest rates to a low of 3.5%, a point suggested late last week as well by Macquarie Bank interest rate strategist, Rory Robertson.

He and the two teams now say we will get a 1% cut in interest rates from the Reserve Bank at its meeting next Tuesday, which will take the cuts since September to 3%, a measure of how seriously the RBA views what is happening in the economy.

But debt futures market are tipping the RBA to cut the cash rate by a massive 1.25% next Tuesday, which if it happens, would be the largest official rate cut since the 1990 recession.

ABN Amro’s chief economist Kieran Davies said a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively.

“The wealth effect of falling asset prices is snowballing and the Chinese economy is slowing very sharply. Also, we think the economy is contracting now. We are close to zero.”

A 1.25% rate cut in December would take the cash rate to 4%.

The cash rate was at 4.25% in late 2001 and has not been below that level since the RBA began publishing its cash rate target in 1990.

Economists point out that the debt futures market is signalling a cash rate low of around 3%, which would be the lowest level for rates since 1960, when the credit squeeze hit that year and

Federal Treasurer Wayne Swan still claims the budget won’t go into deficit: the forecasts reckon it will, and they were supported by the latest update from the well-connected Access Economics team in Canberra.(Source).

Goldman Sachs JBWere’s downgrade follows one in the US from their economics group there for the US on Friday:

Goldman Sachs said US GDP was shrinking at a 5 % annual rate in the current quarter and will drop 3% and 1% in the next two quarters.

It said in a note US unemployment will reach 9% by this time next year. In contrast the US Fed reckons unemployment will get to 7.6% next year (it’s 6.5% at the moment).

This morning in a note to clients sent out over the weekend, Goldman Sachs JBWere said:

“We have revised down our economic growth forecasts from 2.0% in 2008 and 1.7% in 2009, to 1.8% in 2008 and 1.0% in 2009.

The new forecasts incorporate a deeper recession through 2H08 than we first forecast in early October and a shallower recovery path through 2H09.

“We have also revised our interest rate forecasts, with the RBA now expected to cut the cash rate to 3.5% by March 2009 (75bp lower than our previous forecast).

“The combination of dramatic financial wealth destruction, debilitating tightness in money markets, rapidly slowing credit growth, sharp falls in commodity prices and evidence that Australian house prices are declining led us to formally adopt a recession in Australia as our base line view on 12th October.

“Since that time our conviction that Australia is poised for its first recession in 17 years has strengthened.

“The reduction in commodity prices by our resource strategy team suggests that Australia’s terms of trade will decline ~20% year on year by end- 2009, sufficient to strip around 3.0% from domestic demand growth.

“We now expect business investment to decline 7.0% in 2009 (was -1.7%) and domestic demand growth of just 0.6% in 2009 (was 1.8%). As such, we have also raised our estimate of the unemployment rate from 6.5% by end-2009 to 7.5%.

“We believe economic growth will contract -0.5% in the September quarter, -0.3% in the December quarter and -0.1% in the March quarter.

“This would be sufficient to see GDP decline -0.6%yoy in the March quarter 2009 and -0.3%yoy in the June quarter 2009 before an acceleration to +3.25%yoy by December 2009 as the combined effects of the interest rate cuts, A$ weakness and fiscal stimulus coagulate in 2H09 and drive a rebound in demand.

“We remain convinced that the Australian economy faces a debt-deflation cycle. The risk of deflation was brought home to all policymakers by the sharp fall in US inflation in October.

“In essence, we believe the threat of deflation (no matter how small) will accelerate plans of interest rate cuts and we now expect the RBA to cut interest rates 100bp in December, 50bp at its next meeting in February and a further 25bp in March. “This will take the RBA cash rate to 3.5% by March 2009, a 375bp cutting cycle since September 2008.

“We believe the government should worry less about protecting an underlying surplus and more about providing the conditions to promote aggregate demand growth.

“We have downgraded our Market Forecasts reflecting a reality check due to the current market turmoil as well as incorporating the recent revisions to our commodity forecasts and domestic economic growth forecasts.

“Reduced our Industrial top-down FY09 EPS forecast from -5.0% to -15.0% (bottom-up forecast is +3.3%). – Reduced our resources FY09 EPS growth forecast from 0.0% to -15.0% (bottom-up +4.4%) and our FY10 from +15% to -5.0% (bottom-up +20%).

“Our revised forecasts for the ASX200 are: Dec’08: 3400 (previously 4525; -25%) – Jun’09: 3780 (4975; -24%) – Dec’09: 4100 (5350; -23%). The ASX closed at 3374 yesterday , so it’s already under the 2008 forecast of GSJBW.”

Merrill Lynch wrote yesterday:The Australian economy is being overwhelmed by the global financial crisis and external growth shock, impaired credit markets, collapsing asset prices, and imbalances on the household sector balance sheet.

We are downgrading our 2009 GDP forecast to 0.2% (down from 1.7% previously).

We expect the economy to contract on a through the year basis over FY09.

In our view, the very substantial monetary and fiscal policy response and adjustment in the exchange rate will not be sufficient to avoid a recession over 1H2009.

Our business cycle analysis and leading indicator frameworks are pointing to a rapid deceleration in domestic demand growth over the next 3-4 quarters.

Lead indicators of employment (and income growth) have deteriorated significantly over the past quarter.

Our downgrade to GDP growth covers all components of private demand (household spending, housing and business investment) and export volumes.

Business investment in particular will be negatively impacted by the global recession, the fall in the terms of trade and the tightening in the supply of credit.

Global lead indictors have fallen deep into hard landing territory. ML is forecasting global growth of just 1.5% in 2009, down from 3.4% in 2008.

The commodity price and terms of trade decline in 2009 will sharply reduce gross domestic incomes (both directly and indirectly).

The steep decline in asset prices over the past 12 months and need for households to lift savings and de-lever reinforces a very weak outlook for household spending through 2009, despite the cash-flow relief coming from lower interest rates and petrol prices.

We expect the labour market to weaken significantly over the next 12-18 months with employment growth falling to -2.0% by late 2009 and the unemployment rate rising to 7.5%.

The household savings rate is assumed to rise to 3.75% (from 0.9% currently) as de-leveraging intensifies.

We are more optimistic about 2010, with substantial global and domestic policy stimulus expected to support a recovery in growth. We expect GDP growth of 2.2% in 2010, led initially by a cyclical recovery in housing activity and strengthening global growth.

We expect the RBA to lower the cash rate to 3.5% by Q1 2009 in response to the global downturn, the deep slump in domestic demand growth and reduced inflation pressures.

The main focus of policy over the next 6-9 months will be addressing falling corporate and household income growth, which run the risk of exacerbating the de-leveraging underway in the economy.

And on Friday:Citigroup’s global economic team issued its weekly update with these gloomy forecasts:Financial conditions in the United States continue to deteriorate, increasing downside risks.

Collapsing US bond yields reveal considerable scope and need for fiscal action. Fed officials seem poised for further aggressive steps.

With a deepening recession in the euro area, and inflation likely to undershoot the ECB’s target, we expect the ECB to lower rates to 1% by mid-2009.

The Japan economy is likely to contract further, and we expect the BoJ to lower rates again.

The UK economy faces a long, deep contraction. But substantial policy action should eventually generate a recovery.

First Australia, then China’s manufacturing sector had a horror October according to survey results released yesterday.

Then overnight the US, Russia, UK and Europe produced surveys showing similar results.

All signs the slump in the respective economies is deepening.

Stockmarkets in the US and Europe fell by more than 5%, Wall Street was especially weak. Oil fell under $US50 a barrel, copper and other metals plunged, gold lost all of last week’s gains in a $US45 plunge and grains all fell.

US manufacturing contracted in November at the steepest rate in 26 years and the US economy was declared to be in recession officially, and had been since December 2007.

The Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its measure of raw- material costs plunged to the least in six decades, intensifying concern over deflation.

The report came as factory indexes in China, the UK, euro area, Australia and Russia all fell to record lows.

In the eurozone (covering the 15 nations sharing the euro) an index dropped to 35.6, the lowest since Markit Economics began the poll in 1998.

VTB Bank Europe’s index covering Russia fell to 39.8, and the Britain’s Chartered Institute of Purchasing and Supply’s factory index was at 34.4, the lowest since the survey began in January 1992.

Indexes for Poland, Hungary, Sweden and the Czech Republic also fell by record amounts as recession struck their export markets. South African manufacturing shrank at the fastest rate in at least nine years,

China’s Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the country’s Federation of Logistics and Purchasing said yesterday.

Export orders, output and new orders all contracted by the most since the survey began in 2005, which matches reports of slowing shipments, falling industrial production and easing new business as a housing crunch drags activity in other parts of the economy lower and the global slumps hits the external sector.

In Australia the Performance of Manufacturing Index from the Australian Industry Group/Price WaterhouseCoopers was bad news.

A sixth successive monthly decline in November, this time to the all time low of 32.7% from 40.4% in October. The November figure was the lowest since this measure started back in 1992.

The US Business Cycle Dating Committee of the National Bureau of Economic Research said overnight Monday that the US economy went into recession in December of last year.

The Chinese reading was bad news: it shows the gathering shape of the slowdown. Indexes measuring the service sectors of major economies are due for release later in the week and won’t make nice reading.

China last month announced a $US586 billion stimulus package and the biggest interest rate cut in 11 years to revive the economy and counter the risk of spiraling unemployment and social unrest.

We will get another 1% rate cut today from the Reserve Bank, if forecasts from market economists are right. The PMI for Australia increased the chances of the largest possible cut.

China’s export orders declined to 29 in November from 41.4 in October, the survey showed.

The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7. All huge falls and suggesting that the economy slowed sharply in the past four weeks.

(A reading above 50 reflects an expansion, below 50 a contraction).

Chinese growth was 9% in the third quarter from a year earlier, the slowest since 2003. This quarter, growth may cool to 4%, according to JPMorgan Chase & Co and 8% from the Government.

The World Bank last week dropped its 2009 growth forecast for China to 7.5% from a 9.2% estimate in June. That would be the weakest since 1990.

In Australia new orders dropped by 14.4 points to 24.5 points in November, also an all-time low, with food, beverages, textiles, clothing and construction materials among the hardest hit.

Employment also dropped to 33.2 from 37.6 in October, a pointer to a set of bad employment figures next week?

And from South Korea, bad news on exports.

Figures out yesterday show that South Korean exports fell sharply in November compared to a year earlier, falling a massive 18.3% in the month, to $US29.26 billion compared with November, 2007.

It was the largest fall in percentage terms since December 2001.

Imports fell 14.6 percent to $US28.96 billion last month, resulting in a trade surplus of $US297 million.

The Government said ship exports surged 34.7% in November, but other major export items dropped by double digits with car parts and petrochemicals off 30.8 % and 36.6% and general machinery down 24.4%.

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Just as the October credit figures on Friday from the Reserve Bank lifted the chances of a big rate cut later today so yesterday’s business indicators from the Australian Bureau of Statistics have, if anything, increased the chances even more. A cut of 1% is now a very strong chance.

The Business Indicators for the September quarter came in around what the likes of Goldman Sachs JBWere suggested they might be; a bit misleading but strong hints of the sluggish domestic economy.

And that’s what the Reserve Bank has been worrying about. The survey on activity in the manufacturing sector was gloomier, which will suit the RBA’s intentions.

Goldman Sachs said in a preview yesterday morning: “We expect the September quarter Business Indicators report to highlight the speed of the slowdown in the Australian economy.”

The ABS reported that business inventories, the most important figure from the group of indicators (especially for Wednesday’s national accounts for the September quarter) rose by a seasonally adjusted 0.7%.

That’s what Goldman Sachs JBWere forecast and it said in a preview this morning that “given the moderation in demand we are forecasting a large involuntary build-up of inventories.

“While this will support growth this quarter, it will weigh on activity looking further ahead.”

The market forecast was for a rise of just 0.2%, so most analysts under estimated the extent of the slowdown in sales and a build up in stocks. That could be a positive for growth in the national accounts, but a temporary one.

That build up in stocks was strongly suggested by ABS figures which showed in volume terms sales of manufacturing goods and services fell 1.1% in the quarter and 0.1% for wholesalers’ goods and services.

Goldman said business profits would be up 5 (the market forecast a 4.0% rise) and the ABS reported that “The seasonally adjusted estimate for company gross operating profits rose 5.2% in the September quarter 2008.” And “The seasonally adjusted estimate for wages and salaries rose 1.4% in the September quarter 2008.”

Goldman commented:” While we have forecast a 5.0% jump in corporate profits, the majority of this is due to the lagged impact of the increase in bulk commodity contract prices earlier this year. Abstracting from this we expect profitability to soften.”

We have already seen that with a plethora of profit downgrades from some major banks, industrial companies like Goodman Fielder, retailers like Harvey Norman and property groups such as Lend Lease, Mirvac and GPT.

Goldman Sachs JBWere economists warned this morning that the Business Indicators revealed more deeper problems.

“The boost to profits from the lagged pass-through of higher bulk commodity contract prices was anticipated.

“The striking feature of the report is the broad-based weakness in non-mining sales volumes, particularly across Transport & Storage (-3.8%qoq), Property & Business services (-1.4%), Wholesale trade (-0.1%), Manufacturing (-1.1%), Construction (-5.2%).

“We suspect we have now passed-through the peak in the profit cycle, and it is worrying that a general downturn in real activity will coincide with a rapid unwinding in the commodity price gains of recent years.

“Our Q3 GDP forecast is unchanged and we continue to look for a 0.3%qoq contraction in aggregate activity in the September quarter.

“Such a quarterly outcome would be the weakest in almost 8 years and, we believe, kick-off a domestic recession,” Goldman’s said in a note to clients.

And inflation is easing, as it is in every major economy.

November’s TD Securities-Melbourne Institute monthly inflation gauge dropped 0.6%, adding to October’s 0.2% decline.

It was the largest drop in prices since TD Securities began the gauge in August 2002.

For the year to November, the prices rose 3%, down from a 3.9% annual pace in October and more than 5% earlier in the year.

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Oh how it all turns around, and how quickly.

World markets have soared overnight; the Australian dollar has surged against the yen and the US dollar and our market is forecast to jump sharply this morning.

The Standard & Poor’s 500 Index jumped 91.56 points, or 10.79%, to 940.48 after sliding to the lowest level since March 2003 yesterday.

The Dow surged 889.35 points, or 10.88%, to 9,065.12 and the Nasdaq finished up 9.53%, or more than 140 points. Hong Kong’s benchmark index added 14%, its best advance in 11 years, while Germany’s climbed 11% and struggling Brazil’s jumped 13%.

London was up less than 2%: the surge in Germany was due to a sharp rise in the shares of Volkswagen as Porsche surprised the market by revealing it had assembled a controlling 7%% by market buying and playing the derivatives markets.

Hedge funds lost heavily as they had been shorting VW shares and got trapped as the value of the shares soared to the point where the car maker was the most highly valued company in the world a

The overnight futures market was signalling a 6% rise in the ASX 200, or more than 240 points..

That was after one of the most explosive last couple of hours trading ever seen on Wall Street. Therre was a gain of 500-600 points in the last hour.

The Dow posted its second-best point gain ever as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing.

In addition, there’s now a belief the Fed will announce a 0.50% rate cut after its current meeting ends tomorrow morning, our time.

The yen fell the most against the dollar since 1974 and posted its biggest decline versus the euro ever as global stocks rallied and speculation increased that the Bank of Japan will cut interest rates.

There were reports in Tokyo overnight of a plans to cut the key rate 0.25%, which would halve the Bank of Japan’s key rate. The central bank meets Friday in Tokyo.

That saw the yen crash, suffering its biggest loss against the greenback since 1974. It dropped 5% against the US currency in New York. It dropped 11% to 62.70 yen against the Aussie and 10.% to 55.19 against the New Zealand dollar.

The Aussie surged 7% to 64.28 US cents after touching 60.09 cents yesterday, the weakest level since April 2003.

The Reserve Bank of Australia bought dollars for a third day yesterday to stem losses and is now sitting on some nice profits as some of the first day’s intervention Friday night was around 55 Yen..

Sales of longer-term commercial paper soared 10-fold after the fed revealed that two days of backing the slumping US corporate commercial paper market, had revitalised it.

The Fed began buying the corporate paper and on Monday alone the market saw companies yesterday sold 1,511 issues totaling a record $US67.1 billion of the debt due in more than 80 days.

That compared with a daily average of 340 issues valued at $US6.7 billion last week. Dealers said the Fed accounted for $US60 billion of the total.

The Dow’s only larger point gain in a day was on October 13, when the 30-stock gauge jumped 936 points on the government’s plan to buy stakes in banks. We know it plunged several times after that, so this could be a one day wonder.

Now for the Fed’s rate cut, but as that is priced in, will markets fall again?

………….

Business confidence continues to fall, according to the latest survey from the National Australia Bank of monthly business conditions.

While that’s gloomy news, there were a couple of other worrying portents from the NAB survey and from other announcements yesterday.

Residential property prices are looking stretched and the NAB and Merrill Lynch see falls of 5% to 10% coming over the next couple of years, and not much joy after that.

That will be bad news for the likes of Boral, Wattyl, Brickworks, the banks, especially Suncorp and the CBA, and for retailers like Harvey Norman.

Retailing is definitely hurting more than it seems from the outside: even the likes of Billabong, a big name locally and internationally for high margin, very successful sportswear, is seeing fewer items sold, although the slumping Australian dollar is helping offset the slowdown.

Mining companies are reviewing operations because of sliding metal prices, and importers like McPhersons Ltd, are doing the same because of the sliding currency, which bounced around 60 USc after a third successive day of Reserve Bank intervention. (It got up to just under 63 US cents overnight).

Furniture retailer, Nick Scali cut its earnings forecast yesterday because of slumping demand.

According to the NAB, the slump in activity next year will see a surge in unemployment and a blow-out in the federal budget by a massive $30 billion “over the next couple of years”, and force residential house prices to fall by 5% to 10% over the next two years, according to the forecast from the bank, and from analysts at Merrill Lynch (See story below).

And while interest rates will fall further and inflation will follow next year, the slide in house prices will see them stagnating for three to five years: up to 2013 or longer, according to one of those forecasts.The NAB reckons the Australian economy has slowed to 2001 levels (when we almost tipped into recession after the GST boost and the US slump). It sees the Reserve Bank cutting interest rates to 4.5% next year, but has forecast a $10 billion budget deficit for the 2010 financial year.

“While the Government’s Mid-Year Economic and Financial Outlook is due in a couple of weeks, fiscal expansion together with the negative impacts of slower economic growth may well see the Federal Budget turn to small deficit of say around $10bn during the next couple of years.”

It was around $21.7 billion in the year to June 2008, so the turnaround would be of the order of $30 billion.

The NAB also forecast the unemployment rate to rise to 6% during 2009/10) compared with the current rate 4.3%) and “core inflation will return to the RBA’s 2%-3% range’ despite another “near term surprise”, and then fall further in 2010.

The NAB’s forecasts, contained in its latest survey of monthly business conditions, comes as analysts at Merrill Lynch in Sydney have forecast a 10% fall in house prices over the next two years, followed by three to five years of flat or no growth.

The NAB supported the Merrill Lynch contention that residential property prices will fall, but not by quiet as much as 10%.

“Our macro forecasts suggest that as the unemployment rate rises sharply through late 2009, the residential property market may deteriorate further into 2010 – notwithstanding improved affordability associated with significantly lower interest rates. Our forecasts are broadly based on unchanged housing prices in 2009 with a moderate further fall of around 5 per cent into 2010.”

And leading retailer, Harvey Norman, revealed for a third week in a row that it is experiencing ‘negative’ same store sales growth: in the seven days to Sunday October 26, same store sales across Harvey Norman’s Australian stores fell 3.6%, after falls of 5.7% and 4.8% in the preceding three weeks.

Harvey Norman’s experience was supported by an update from a smaller Melbourne-based competitor, Clive Peeters, which told the market last Friday that same store sales were off 10% to 14% in the three months of the September quarter and things are not improving. The company will provide a fuller update at its AGM later in the week.

And Nick Scali’s annual meeting in Sydney heard yesterday that the company first half sales and profit for 2009 will be affected by the slowing economy and weakening Australian dollar.

CEO, Anthony Scali said while there been encouraging signs over the past three months in “sales order intake”, sales for the first half were expected to be about $2 million below the corresponding period last year.

“The recent weakening of the Australian dollar in a very short period will cause a substantial one-off decline in our gross profit for the first half of 2008/09 and is expected to reduce earnings by $0.9 million to $1.4 million,” Mr Scali told the AGM.

“Our net profit after tax for the first half of the current financial year is now likely to be between $2.3 million to $2.8 million, against the $4.62 million earned in the December half of 2007.”

Harvey Norman has already revealed an 18% drop in earnings for the first two months of this financial year because of a slump in Ireland. But it hasn’t upgraded that forecast because of the slump over the past month to six weeks in Australia.

The NAB said it expects Australian economic growth to slow to 1.25% next year as the ” full effects of falls in share and key commodity prices fall and slow global growth weigh on prospects, notwithstanding expectations of stimulatory policy responses from both Governments and RBA.’

It said its local forecasts remain “unchanged on the bearish side of “consensus” view. Downside risks remain – at home & abroad – with much dependent on success of global financial rescue underway”.

The NAB said it expects the RBA cash rate cut from 6% to 4.5% by mid 2009 as well as aggressive cuts by central banks elsewhere;

It said the “Federal Budget is likely to go from surplus to deficit of around $10 billion”, which would be a $31 billion turnaround!

“Global GDP growth (on a broader definition) forecast lowered to only 2.5% in 2009 – including recessions in US, UK, Japan and Europe, together with slower growth in emerging economies;

“Business conditions to weaken significantly to mid 2001 levels – consistent with subdued current activity & annual growth in non-farm GDP slowing to 2% in Q3 2008; • Business confidence steadies for now – well above levels of 1990 recession.”

The NAB said its index of business conditions dropped 11 points to -4 index points in the three months to September, one of the biggest quarterly falls in the past two decades,

“The proportion of firms reporting the availability of labour as a constraint on current output has fallen from a recent record of 72% in early 2008 to 66% in the September quarter,” said NAB group chief economist Alan Oster in a statement.

“While the proportion of employers nominating labour shortages as the main constraint on their 12 month profit outlook has fallen from a recent record of 33% to 13% in the latest survey.”

Slumping consumer demand and slower lending activity pushed down all of the components of the gauge to levels seen in 2001, when business conditions stood at -11 index points.

Trading conditions contracted 11 points to -4 points, profits have also lost 10 index points to rank -8point, and employment – which was flat in the June quarter – edged down 3 points to -3 points.

Business confidence, a forward looking indicator, increased 1 index point to -7 index points for the December quarter, below their mid-2000 levels.

“Businesses expect conditions to slow significantly further in the December quarter of 2008,” Mr Oster said.

The bank said major economies would slow further “due to lags associated with negative wealth effects from lower equity and house prices”.

“Recessions are forecast for the US, Europe, Japan and UK, while growth moderates in developing economies,” the bank said in the statement.

Markets in the US fell, Asia was lower, and Europe was weak as doubts continued over the US treasury’s $US700 billion bailout plan.The Dow was down 161.52 points, or 1.47%, at 10,854.17. The Standard & Poor’s 500 Index was off 18.87 points, or 1.56%, at 1188.22 while Nasdaq was down 25.64 points, or 1.18%, at 2153.34.Worries about the economy saw the US dollar rise again most currencies, especially the euro and the Aussie which traded around 83.10 US cents, down around a cent in a day.Gold fell $US11 an ounce to around $US897; oil dropped more than $US2.50 to just over $US106.70 a barrel and copper lost 11 US cents to end at $US3.14 a pound in New York.Our market was off more than 1%, according to the overnight futures market and the ASX/200 could start around 70 points down this morning.In new York BHP Billion and Rio Tinto shares were weak as analysts saidf iron ore exporters would get smaller than expected price rises next year.Rio’s American depositary receipts fell the most since at least 1990, losing 13% to $US289.14 and BHP’s ADRs slipped 5.2% to $US61.77.General Electric was the biggest drag on the S&P 500, falling more than 4%, after Goldman Sachs cut the company’s profit outlook. GE’s fall also hit the Dow. GE had itself added to the uS anti-shorting list.Downgrades also hurt Bank of America shares, off 2.5%, while energy company shares fell as the price of oil retreated.More details were made public with US Congressional hearings starting overnight in Washington, but Wall Street didn’t like the debate and delays..Treasury Secretary, Hank Paulson, President Bush and Fed chairman Ben Bernanke all urged Congress to swiftly approve the plan.Chairman Bernanke warned that the US economy would contract if the plan was not adopted and adopted quickly.But there are concerns the Democrats might try to ram through one off pork barrel deals or attempts to control banking salaries, while some Republicans have expressed doubts about the whole idea.Comments from the head of the Senate banking Committee, Senator Dodd didn’t help sentiment.He said this morning government economic rescue plan was “not acceptable” in its current state.”A lot of reservations have been expressed this morning by Democrats and Republicans on this matter,” said Dodd, a Democrat, speaking after Paulson and Federal Reserve chief Ben Bernanke testified in Congress.”What they have sent to us this is not acceptable,” said Dodd. “This is not going to work.”Wall Street tumbled more than 160 points after hearing that, going from being slightly up, to well down on the day.European stock-index futures dropped with Dow Jones Euro Stoxx 50 Index futures off 1.9%National indexes decreased in all 18 western European markets. London’s FTSE 100 lost 1.9%.Asian markets ended the sharp two day rally on those doubts about the Paulson plan.The MSCI Asia Pacific Index (excluding Japan) fell 1.9% with financial shares the big fallers.Stocks fell around the region, except in South Korea, Taiwan and Malaysia. Markets in Japan are shut for a holiday.China’s CSI 300 index dropped 3.8%. Hong Kong was off 3.9%.The Australian share market lost 1.9%, ending the two-session rebound, as doubts grew about whether the $US700 billion ($A840 billion) US financial bailout package would work.The ASX 200 index ended down 97 points, or 1.9% at 4923.5, after rising 4.5% on Monday.Australian shares traded lower as regulators announced exemptions to the ban on short selling and detailed proposed legislation to better control it.At the close the All Ordinaries was down 92.4 points, or 1.8%, to 4957.7.BHP Billiton fell $1.80, or 4.5%, to $37.90, Rio Tinto dropped $2.76, or 2.5%, to $108.24 and Fortescue Metals shed 64 cents, or 9%, to $6.51.Banking led the way down with the ANZ losing $1.11 to $18.04, the Commonwealth Bank 38 cents to $44.22, the National Australia Bank 44 cents to $23.86 and Westpac 20 cents to $24.50.Retailers were mixed, with Harvey Norman adding one cent to $3.51, Woolworths dropping 52 cents to $27.01, Wesfarmers retreating 57 cents to $31.18 and David Jones falling one cent to $4.39 ahead of the release of its full year results later today.Media was mixed, with Consolidated Media Holdings adding three cents to $2.75, Fairfax falling 13 cents to $2.85, News Corp shedding 71 cents to $15.78 and its non-voting shares losing 70 cents to $15.51.Telecommunications provider SP Telemedia lost one cent to 14 cents after reporting a full year loss of $18.93 million following debt write-offs, and cut its earnings guidance for the new year. It’s part of the Washington Soul Patts group whose 61% owned subsidiary New Hope Corp losing six cents to $4.40 despite forecasting significant earnings growth this year and delivering a rise in annual profit to $90.68 millionSantos added 17 cents to $18.70; Woodside dropped a cent to $56.99 and Oil Search lost nine cents to $5.53.The spot price of gold was higher was trading at $US891.30 an ounce by late yesterday, up $US20.15 on yesterday’s local close of $US871.15 an ounce.Gold miners were stronger, with Newcrest adding $1.34 to $26.84, Lihir 12 cents to $2.77 and Newmont 16 cents to $5.15.Telstra was the most traded stock on the market, with 42.05 million shares changing hands, collectively worth $172 million. Its shares rose 16 cents to $3.98.And in a report issued this morning, the International Monetary Fund says Australia is well placed to withstand the credit crunch.In particular, the report notes that IMF “Directors welcomed the support that prudent fiscal policy is providing for monetary policy.”The IMF Executive Board considered that Australia’s banking system remains resilient, with stable profits, high capitalisation and few non-performing loans. This was evident in stress tests undertaken by the IMF and presented in their report, which showed that Australian banks are able to absorb ‘extreme’ shocks.The IMF considers that the outlook for the economy is more uncertain than usual due to large countervailing forces impacting on the economy, with the commodity boom providing a substantial stimulus and the global downturn exerting a contractionary effect. IMF staff forecast that real GDP growth will moderate as required to bring underlying inflation back within the RBA’s target range.On an annual basis the IMF consults with the Australian authorities, private sector economists and academia to provide an independent and comprehensive assessment of Australia’s economic performance. This forms part of its program of economic consultations with all IMF member countries.

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