>Australia faces a recession despite renewed efforts by the Government,

>The Economist brings us a pretty bleak outlook for the Australian economy. Here are some of the key points worth heeding and planning for in the year ahead:

To prevent a recession, the Australian government on February 3rd unveiled a A$42bn (US$27bn) stimulus package. At the same time, the Reserve Bank of Australia (RBA, the central bank) slashed its benchmark interest rate by one percentage point to 3.25%—the lowest level in 45 years. But given the morose global economic outlook, Australia’s doubling down on the economic rescue may not be enough to stave off recession this year.

Among developed economies, Australia so far has weathered the global financial crisis better than most. Its economy continues to grow (albeit just barely—at 0.1% quarter on quarter in the three months ending in September 2008); and its banking system remains relatively unexposed to the toxic mess coming out of Wall Street. But the Labor government of Kevin Rudd, the prime minister, clearly feels it cannot be too prudent in the current climate of an ever-deepening doom and gloom surrounding the world economy. As demand abroad for its commodities and consumer confidence at home dive, Australia’s economic prospects for 2009 look worrying. In announcing the stimulus plan, Mr Rudd said that the country faces “an unfolding national and international emergency” and that his government “will move heaven and earth to reduce the impact of the global recession on Australia”.

That effort will include financing A$29bn in infrastructure building (namely schools and public housing) over the next four years, and A$13bn in cash handouts to low-income workers and farmers. The massive spending comes on top of the A$10.4bn stimulus programme announced in October, which took the form of lump-sum cash payments to pensioners and low- and middle-income families in the hope that it would trigger a quick recovery in consumption spending. The first package did boost retail sales in December, and Mr Rudd believes that the additional fiscal pump-priming—which represents 3.6% of GDP—will ensure economic growth remains in positive territory, saving tens of thousands of jobs in the process.

The government hopes the RBA’s simultaneous rate cut will supercharge its counter cyclical effort. The central bank has now slashed its official cash rate by four percentage points in the past six months, despite the fact that inflation, at 3.7%, remains above its target of 2-3%. The RBA has also been complementing its aggressive moves to lower the cost of money by taking steps to improve liquidity in domestic markets, such as widening the range of securities that it is willing to purchase for cash.

The stimulus, however, will contribute to the government’s first budget deficit since fiscal 2001/02. The government plans to issue bonds to fund the package, which along with declining tax collection will help drive the budget A$22.3bn into the red in 2008/09 (the current fiscal year began in July). Mr Rudd assured that as soon as economic growth tops 3% again, the government would limit spending growth to 2% a year to try to balance the budget.

He is unlikely to succeed. The proposed spending has wide public support, and even the opposition politicians concede that government action is necessary to prevent the worst for the Australian economy. But whether the stimulus will succeed in averting recession is uncertain. The Economist Intelligence Unit’s latest forecast, taking into account the A$42bn stimulus, still sees Australia’s real GDP growth contracting by 1% in 2009. The risks for an even worse contraction are significant. With the global economic slump deepening, some of the world’s major economies could slip into deflation, prolonging their recessions and Australian exporters’ woes. A more pronounced slowdown in China, too, would also have a significant adverse effect on Australia’s commodity exports. Domestically, the housing market is a worry. Given the strong price increases seen in recent years, the possibility of a sharp fall in house prices and the negative wealth effect would have a severe impact on consumer demand.

So Australia is being dragged down with the rest of the world. The best thing to prepare for a recession is to have 6-12 months of emergency funds, stable job prospects for at least one working member in your household and learning to live a frugal lifestyle.

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