Australian biggest six-month fall in wealth since the 1982-83 recession.

Alarm over fall in wealth

TUMBLING share markets and sliding property prices have produced the biggest six-month fall in wealth since the 1982-83 recession. The fall in wealth comes as income growth has stagnated and is expected to cause consumer spending to remain weak into next year. However, Finance Minister Lindsay Tanner called on people tipping a recession to take a reality check, saying the economy was still in good shape, even though it was slowing. "It's crucial that we don't get spooked by one or two bad sets of figures," he said, ahead of the Reserve Bank board meeting tomorrow. He said the budget tax cuts andthe continuing resources boom would keep the economy "ticking along".

"Yes, the economy is slowing, yes, we need to take the steam out of inflation, but people talking recession are getting way ahead of the facts."

However, economists say there is a growing number of indicators showing the economy is in danger of contracting. Investment bank ABN-Amro estimates that average wealth fell by 5 per cent in the first half of this year. The bank's chief economist, Kieran Davies, said declines in wealth were unusual, with the decline in the early 1980s the only time since World War II when wealth dropped more rapidly than in the past six months:

"The rapid decline in wealth is another series that can be added to the already long list of indicators that are behaving as if the economy is on the edge of, or in, recession."

The value of household financial assets fell by 6.6 per cent in the March quarter as share prices plummeted and by a further 1.25 to 1.5 per cent in the June quarter.
Housing accounts for about two-thirds of household wealth and is also slipping in value. Preliminary estimates suggest that housing prices fell by about 2 per cent in the second quarter.
Mr Davies said the fall in wealth this year contrasts with the 11 per cent growth in the value of household assets last year.

Households traditionally spend a portion of increases in wealth, and cut back when it falls.
Mr Davies said there was a possibility spending could decline by 1 per cent. He said rising interest rates and inflation had also brought growth in disposable income to a halt, after rising at a rate of 8 per cent last year.

He said this year's tax cuts should lift income by about 1 per cent, but the underlying trend showed no growth.

Although financial markets expect the Reserve Bank to deliver its first cut to interest rates in September, most economists believe it will take longer for the bank to act.

A survey of private sector economists conducted by Reuters found that only 8 out of the 21 it asked expected rate cuts this year, with only a 30 per cent chance given to a cut by September.
All but one of the economists expect the Reserve Bank will have cut interest rates by this time next year.

The Reserve Bank may want to see some evidence that the slowdown is affecting the labour market before concluding that the threat to inflation from an over-stretched economy has eased.
Employment figures for July will be released on Thursday, with economists tipping a small increase in the unemployment rate to 4.3 per cent.

Full story at The Australian

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