Morgan Stanley: Australia needs stimulus to avoid recession

Australia could face its first recession in almost 25 years unless authorities further stimulate the economy, Morgan Stanley said.

The nation’s economy will expand just 1.9 percent in 2015, with 1.5 percentage points of that coming from higher exports, and unemployment will climb to 6.8 percent, Morgan Stanley economists led by Daniel Blake said in a research report today.

They project the currency will fall to 76 U.S. cents by the end of next year from 87.37 cents at 11:10 a.m. in Sydney.

“The economic transition in Australia from the resources boom to east-coast recovery has stalled,” they said. “We revise our key forecasts downward, which in turn make future policy settings key to avoiding recession.”

Australian economic forecast

Policy makers are playing a waiting game for low interest rates to gain traction beyond a surging housing market in the country’s eastern states. The Reserve Bank of Australia has kept its benchmark interest rate at a record-low 2.5 percent for the past 15 months to boost growth and hiring.

The bureau of statistics reported yesterday that the nation’s labor market had 24,400 fewer jobs in September than previously reported and the unemployment rate was 6.2 percent, rather than 6.1 percent, following a review of its methodology.

“The market is underestimating the degree of employment shock ahead,” Morgan Stanley said. Unemployment at almost 7 percent combined “with a deteriorating income growth profile, under 3 percent, and negative feedback on confidence and discretionary spending is envisaged,” the economists said.

‘Alarmist’ Narrative

Morgan Stanley said the terms of trade, or export prices relative to import prices, is under pressure due to additional resource supply from new mines and signs China will accelerate its economic rebalancing away from investment. The Australian government’s “alarmist budget narrative” has also damaged “animal spirits” and consumers’ willingness to dip into their high savings, the bank said.

RBA Governor Glenn Stevens has called for a revival of animal spirits to spur companies to spend and take risks. Morgan Stanley sees a 45 percent chance Stevens and his board will cut rates over the next year, though their base case remains steady rates until an increase in the first quarter of 2016.

Australia dollar AUD

Tony Abbott’s government is trying to narrow a budget surplus that swelled to almost A$48.5 billion ($42.4 billion) last fiscal year. Abbott has said he wants to be known as the infrastructure prime minister.

Morgan Stanley said the public infrastructure program “will not fill the gap” in 2015 and the budget deficit will be “staying wide” in 2015-2016 as “automatic stabilizers are utilized.” It predicts the “political target of a surplus in four years” will be pushed out.