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Economists divided on recession in Australia

By Alison Bell
08 Mar 2009 4:45 PM

MELBOURNE, March 8 AAP - Economists are divided over whether Australia can avoid a recession after December quarter data showed the first contraction in economic growth in eight years.

Last week's figures showed a 0.5 per cent drop in gross domestic product (GDP) in the December quarter, although the economy has so far avoided a "technical" recession after September quarter GDP rose by 0.1 per cent.

National Australia Bank chief economist Alan Oster says Australia is already in a recession, defined by economists as two consecutive quarters of negative economic growth.

Mr Oster said the recession started during the December quarter and the economy would weaken by another 0.5 per cent to 0.6 per cent in the first quarter of 2009.

"In the March quarter I think we're going to go backwards," he told ABC TV.

"The partial data we're seeing and what we're seeing through the banking sector is that March was worse than the December quarter."

Mr Oster suggests a recession will last until early 2010 at the latest, by which time unemployment will probably be around seven per cent, up from the current level of 4.75 per cent.

But CommSec chief economist Craig James and ICAP Australia economist Adam Carr are more upbeat in their assessment of the December 2008 quarter.

Mr James said the Australian economy remains in very good shape with flat rather than negative growth, and the negative 0.5 per cent GDP figure for the December quarter was caused by an error term used as part of the GDP calculation.

"If you look closely at the figures they have an error term that tries to make the figures add up.

"It was that error term that contributed all the downturn in the economy so the best representation of our economy is flat rather than anything else. It's not falling, but it's not rising either," he told AAP.

"Negative 0.5 per cent is a drop in the ocean compared to what's happening elsewhere in the world."

Mr Carr said the December quarter GDP figure made calling a recession a very close call.

"It's a line ball. I don't think it's a fait accompli that we'll go into a recession," he told ABC TV.

"We really had a negative (quarter) of growth because manufacturers are retrenching stock so aggressively," he said, adding that Australia has not experienced a meaningful slump in demand.

"Until we see investment and consumption slump there's still the hope that we could avoid two quarters of negative growth. It's a fading hope but it's still there."

Mr Carr said arguments that Australia is in a recession despite not meeting the technical definition are "absurd" especially given the still relatively low unemployment rate.

But building approvals needed to pick up to arrest a decline, he said.

If Australia did avoid a recession, it could thank its housing shortage and moderate business investment levels, along with the government's policy response that was a stark departure from the response to previous recessions, he said.

"The policy response is so different - interest rates have been cut by 400 basis points, the fiscal side is doing their job, and we've got this demand wanting, we've got a housing shortage."

Mr Oster is expecting the government to inject another $15 billion into the economy as part of the May budget, and said the Reserve Bank would cut interest rates to two per cent by the end of 2009.