that global output will contract in 2009 This would be the first annual

That global output will contract in 2009 this would

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that global output will contract in 2009. This would be the first annual contraction in output since at least the Second World War. The weak global macroeconomic outlook implies that borrowers have become riskier. Some are likely to face greater difficulty servicing their debts. Bad loans normally rise relative to total lending when economies turn down, and the current global downturn will be no exception to this pattern. In the current environment, this could weigh on the profitability of already weakened banking sectors in the major economies. The Australian Scene The Australian financial system has withstood the shocks coming from overseas better than many others. Australian-owned banks have recorded solid profits over the past year. Unlike banks in many other countries, they have been able to raise additional capital where required from private investors, at only modest discounts to the market price of their equity at the time. There are a number of reasons for their relatively good performance during a period of considerable turbulence. One of these is that they had not previously accumulated large exposures to the kinds of tradable securities in which losses at other banks have been concentrated. Rather, Australian banks were focused on their domestic lending business. Australia usually runs a current account deficit, so our banks were seeking offshore funding for their domestic activities, not casting around for foreign assets in which they could invest their domestic surpluses. Another reason is that housing and mortgage markets did not become as over-extended as in the United States. For a start, the underlying position of the household sector was better in Australia. Graph 13 shows two aspects of this point. First, in the left panel, the real earnings of average Australian workers were growing much faster than in the United States. Second, in the right panel, the total incomes of typical Australian households have been further boosted by the tight labour market. The employment-to-population ratio has been rising here; by contrast, in the United States, it never really recovered from its 2001 recession. The housing market in Australia also wasn’t so over-extended, and in any case it had already had its boom. As the left panel of Graph 14 shows, the truly rapid growth rates in national housing prices had ceased around the end of 2003, especially for apartments. The Australian market was going through a period of consolidation when the US market melted down. Prices were still rising in Australia, especially in Perth and other areas affected by the mining boom. But unlike Graph 12 -1 0 1 2 3 4 5 -1 0 1 2 3 4 5 World GDP Year-ended percentage change % % 2010 2005 Source: IMF 2000 1995 1990 Forecast – January 2009 Forecast – March 2009 1985 1980
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3 2 R E S E R V E B A N K O F A U S T R A L I A in the United States, housing supply had not boomed in the same way for the past five years. There simply has not been an overhang of supply built up that would subsequently weigh on prices.
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