Australia's economy unexpectedly shrank for the first time in eight years last quarter as chastened consumers chose to save rather than spend, reviving pressure for yet more monetary and fiscal stimulus.
The Australian dollar slid while bill futures surged as investors wagered the Reserve Bank of Australia (RBA) might come to regret its decision this week not to cut rates and so now would have to do so in April.
"A massively, massively weak number and this is the necessary condition for the first leg of a recession," said Joshua Williamson, a senior strategist at TD Securities.
The common definition of recession is two successive quarters of contraction in gross domestic product and the last time Australia suffered that was in 1991.
"Global weakness has now extended well and truly to Australia and should add to expectations for more aggressive rate easings in coming months, especially given the RBA's decision yesterday to keep rates on hold," said Williamson.
Investors rushed to price back in the prospect of a 50 basis point cut in the 3.25 per cent cash rate when the RBA next meets on April 7th, and suggested it could approach 2 per cent by mid-year.
Today's report showed GDP, essentially the value of all goods and services produced in Australia, fell 0.5 per cent last quarter from the third quarter, when it rose 0.1 per cent.
Companies cut production and stocks and household consumption was static, wiping out gains from exports. The result was well below forecasts of 0.2 per cent growth and was the first drop since 1991, when the introduction of a sales tax caused a one-off slump in demand.
Treasurer Wayne Swan laid the blame on the rest of the world.
"There has just been such a savage contraction in global demand," he told reporters. "It is impacting and ripping through economies in all sorts of ways."
But he also highlighted how Australia had fared better than others. Japan saw GDP fall 3.3 per cent last quarter, while Korea suffered a 5.6 per cent drop, the euro area 1.5 per cent and the United States 1.6 per cent.
Reuters