the worst is not over .... steven long

Economics correspondent analyses the week in finance
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Australian Broadcasting Corporation

Broadcast: 03/05/2008

Reporter: Stephen Long

Economics correspondent Stephen Long joins Lateline to discuss the week in finance.

Transcript
VIRGINIA TRIOLI, PRESENTER: The United States has narrowly avoided a recession, at least on the figures so far. And according to the chief executive of Westpac bank, the credit crunch is easing too. Gail Kelly says the worst is over. But, is it too good to be true?

Well, you know what economics correspondent Stephen Long is going to think of that.

Stephen?

STEPHEN LONG, ECONOMICS CORRESPONDENT: Of course it's too good to be true.

VIRGINIA TRIOLI: Of course it's too good to be true!

Come on, tell us about it.

STEPHEN LONG: Well, these GDP numbers out of the United States were really a false reading. The only thing that kept the American economy in the positive was a big run up of inventories. In other words, goods and parts being warehoused. Now, there's a statistical quirk in the national accounts in the way they're read in the US and here where inventories are counted as a positive contribution to economic growth, if they're rising. But they can actually be an indication that things are getting sicker in the economy, and in this case it is almost certainly the case that in the United States, inventories are running up because they just can't sell the stuff. The US economy is in recession right now, I would wager.

VIRGINIA TRIOLI: So, the fact that the US GDP came ...

STEPHEN LONG: ... and it's gonna get worse.

VIRGINIA TRIOLI: It's going to get worse. But the fact that US GDP came in better this week, what, 0.6 of one per cent - that doesn't tell a better story for you?

STEPHEN LONG: No, no. I think it's gonna get worse from here. I really do. And, that figure is just a false reading because of that statistical quirk. And, a lot of things tell us that: one, is what's happening with house prices. What's at the root of this whole mess? It was the sub-prime mortgage market and the problem with mortgage defaults in the US. Look at what's happening with house prices. The most reliable index came out this week. It showed that for the first time since statistics have been recorded in the US, every major capital city right across the country is down. Usually it's just certain regions. 17 out of the 20 cities were down by a record amount and then the past three months, it's got much worse - it's accelerating.

VIRGINIA TRIOLI: What about the situation for house prices and interest rates here, though?

STEPHEN LONG: Well, house prices, according to Australian property monitors here, are flat, and they're predicting big falls. What that means for interest rates, though, is another matter. We've had a number of people, including Gail Kelly at Westpac, saying that rates are now on hold and the next move will be down. Well, the latest retail trade numbers out today were more resilient than a lot of people expected. Inflation still at 4.2 per cent, and, there's no guarantees that we won't see another rates rise. It's actually just too hard to call. The Reserve will probably sit on its hands when it meets next week, but who's to say for sure?

VIRGINIA TRIOLI: So just quickly and finally, then, when Gail Kelly says the worst is over, she's just speaking about her situation at Westpac, then.

STEPHEN LONG: Well, this is the latest in a series of voices, a chorus of voices from bank executives around the world saying the worst is over. One of them will be right at some stage, but so far, every time one of the bank executives has said that, lo and behold, there's been another big loss announced by one of their rivals or peers around the world.

VIRGINIA TRIOLI: Stephen Long, thank you.

STEPHEN LONG: You're welcome.