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Australia 'may escape' recession

By Stephen Johnson
23 Feb 2009 3:07 PM

SYDNEY, Feb 23 AAP - Australia may escape a recession in 2009, although analysts say a sluggish housing sector and possible downgrades to state government credit ratings could affect confidence in the economy.

The world's premier economies of the US, Japan and Germany are already in recession, along with at least 11 other industrialised countries.

CommSec chief economist Craig James says Australia could enjoy its 18th consecutive year of growth as big interest rate cuts and federal government stimulus programs support the economy.

"While the global downturn is far bigger than the 2001 slowdown, it is not out of the question that Australia could avoid recession yet again," Mr James said.

"No other country has received the same economic boost from all three factors - government spending, lower interest rates and a cheaper Aussie dollar.

"But whether meeting the technical definition of recession or not, the economy faces significant challenges over 2009."

Mr James said also that Australian banks were in a better financial position than the US and Europe, and had a higher exposure to the domestic market.

"Australian banks are still recording solid profits at time when overseas banks are reporting losses," he said.

Mr James said Australian house prices were unlikely to fall because there was an undersupply of housing.

The Housing Industry Association (HIA) expects home building starts to fall by 17 per cent this financial year before recovering in 2009/10 as the large interest rate cuts eventually stimulate activity.

"Current housing conditions remain, notwithstanding some spark from the first home buyer market," HIA chief economist Harley Dale said.

The Reserve Bank of Australia has cut interest rates by 400 basis points since September, taking the cash rate to a 45-year low of 3.25 per cent.

The federal government has unveiled two economic stimulus programs, worth a combined $52 billion, to boost infrastructure and consumer spending.

The earlier stimulus package, announced in October, doubled the first home buyer grant for established homes to $14,000.

However, ICAP senior economist Adam Carr said the downgrade of Queensland's credit rating to AA-plus, from AAA, by Standard & Poor's last week was likely to be followed by other states and affect the view investors took of Australian state governments when they raised debt finance.

"(There is a) good chance that it will be followed by more downgrades for other states," he said.

"It's at least got to increase that likelihood."

Until recently, Queensland was one of the biggest beneficiaries of the commodities boom but now joins Tasmania as the only other state not to have a AAA rating.

Analysts expect NSW to eventually have its credit rating downgraded because of its negative outlook.

Standard and Poor's cited the deteriorating budgetary performance of Queensland because of declining revenues, including mining royalties, as its reason for the downgrade.

A recession is defined as two consecutive quarters of economic contraction, and last occurred in Australia in 1991.