Gloom, but not doom

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The Australian economy will not fall into recession despite signs of slowdown according to leading forecasters.

BIS Shrapnel economist Rachael Logie said the Reserve Bank's aggressive reduction in interest rates - now down 3% from early September - combined with the government's strong fiscal stimulus package have been geared to restart the economy.

"Increases in household disposable income will eventually outweigh the discretionary saving associated with fear of loss of income," Logie said.

"There is simply no good reason for Australia to fall into recession, however if the negative sentiment continues, we could talk ourselves into one."

Australia is not in the same dire position as other developed western countries, which have been caught out with over-investment, a collapse in property prices and bank balance sheets, problems of bank insolvency, and weakening construction according to Logie.

"Australian residential property markets are not over supplied, and after the current shock, prices and construction will rise, not fall," Logie said.

"For now, affordability is improving due to interest rate cuts. Rents continue to rise, and with governments contributing to first home owner deposits, investment in housing is starting to become attractive again."

In the short-term, the Australia economy will be boosted by the strength of investment as the current round of projects are finished, the drought eases and exports strengthen as extra capacity from the minerals boom comes on-stream.

The real problem will be the lack of confidence, Logie said, which is affecting both household and business expenditure.

"Australian households became increasingly uncertain with four interest rate rises in the eight months to April 2008 and rocketing petrol prices, which severely affected their disposable income - and the events of the financial crisis did nothing to allay those fears and households were flung into precautionary savings mode, petrified of losing their jobs," Logie said.

However, the Australian economy will soon reach a point when the increased income outweighs the fear of job loss.

"It is only a matter of time before households start to spend again," predicts Logie. "Once confident of job security, and with income growing strongly, they will start to spend."

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