Forget 2009, Australian analysts look forward to next year

Australia can no longer escape slipping into its first recession in 18 years this year as unemployment is set to rise more than expected following a surprisingly sharp economic deterioration in the past month.

The weak spots, to name a few, include lower export earnings and slowing business investment, all in all painting a picture so grim some analysts wish to fast forward to recovery in 2010.

For the central bank, that means it may have to step up its efforts to spur growth, after already slashing its key cash rate by three percentage points to 4.25 per cent since September in its most aggressive easing since the recession of the early 1990s.

"Certainly if we do see a big rise in the unemployment rate, then it would really put a lot more pressure on the Reserve Bank to keep on cutting rates," said Brian Redican, senior economist at Macquarie Bank.

That could pummel the Aussie dollar, which slumped a record 21 per cent last year, by another 30 per cent to as low as below €0.037 by the end of March, according to Morgan Stanley.

Analysts and the market predict the central bank to slash interest rates to around 2.5 to three per cent by June.

Still slowing business investment as well as increasing evidence of a slowdown in China, Australia's biggest trading partner, could mean any economic recovery would have to wait until 2010.

"Recession already is baked in Australia's cake," said Stephen Walters, chief economist at JPMorgan, forecasting economic growth at virtually zero for all of this year.

"The main headwind for households is rising unemployment: We anticipate a doubling of the jobless rate to nine per cent by the end of next year."

The jobless rate ended last year at a still low 4.4 per cent - compared to 6.8 per cent in the US - but leading indicators such as job advertisements and business surveys all point to weakness ahead.

The government itself hopes the jobless rate will only climb to around 5.75 per cent by the middle of next year, but most analysts see it heading north of six per cent.

"That is really going to hold the key for the depth and the duration of this slowdown," Su-Lin Ong, a senior economist at RBC Capital Markets.

"Compared to the last recession, Australian households are more indebted now so labour market job security is going to be quite a big issue in terms of how much of an impact it has on overall growth," she said.

Private consumption makes up 60 per cent of Australia's €580 billion economy.

During Australia's last recession in 1991, unemployment peaked at 10.1 per cent.

But rising unemployment could help Australia in the longer term as it would lead households, one of the most indebted in the world, to save more.

Household savings as a proportion of income in Australia could climb towards five to six per cent this year from three to four per cent now, said Stephen Roberts, an economist at Nomura Research.

"Longer term, it means that there is actually a base for savings which people would be spending from. It would actually a healthier position for household spending longer term," said Mr Roberts.