Australia still risks recession in second half

June 17, 2009 05:42:02 PM

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Australia may have avoided a recession earlier this year but it remains vulnerable to contraction in the second half of 2009, according to a monthly index compiled by one of the country's largest banks.

The Westpac-Melbourne Institute leading index -- which predicts economic activity three to nine months into the future -- was negative 3.5 percent in April, well below its long-term trend of positive 2.8 percent.

While the latest reading was an improvement on the negative 5.1 recorded in March and the 27-year low of negative 6.1 a month earlier, Westpac chief economist Bill Evans said it still pointed to a tough final six months.

"Its current pace is still consistent with the Australian economy contracting in the June and September quarters," he said.

Two consecutive quarters of negative growth would constitute a technical recession, a fate that Australia avoided earlier this year when the economy contracted in the final months of 2008 but grew modestly in the next quarter.

That result sparked a wave of optimism in Australia, with consumer confidence staging its largest monthly jump in 22 years on the belief that the economy had dodged a recession despite the global downturn.

While the latest index indicated a recession was still possible, Evans indicated that if it was to happen it would be shallow, with positive growth expected to resume in the first half of 2010.

Evans said signs the economy was slowing meant the Reserve Bank would be in no hurry to cut interest rates next month, although it was likely to ease monetary policy further over the longer term.

"Rising unemployment, higher fixed interest rates, and likely economic disappointment offshore will continue to make the case for more rate cuts in Australia," he said.

Rates in Australia fell from 7.25 percent to a 49-year low of 3.0 percent between September and April but the central bank has since left monetary policy on hold as it assesses whether the worst of the economic crisis is over.

The index uses factors such as share prices, dwelling approvals, corporate profits and commodity prices to predict future economic activity.