5 Mar 2009

Australia on brink of recession as economy shrinks

5:36 am on 5 March 2009

Australia's economy unexpectedly shrank for the first time in eight years last quarter as consumers chose to save rather than spend.

The Australian dollar slid while bill futures surged as investors wagered that the Reserve Bank of Australia might come to regret a decision on Tuesday not to cut interest rates and so now would have to do so in April.

The definition of recession is two successive quarters of contraction in gross domestic product. The last time Australia suffered that was in 1991.

Investors have priced back in the prospect of a 50 basis point cut in the 3.25% cash rate when the Reserve Bank next meets on 7 April, and suggested it could approach 2% by the middle of the year.

The report on Wednesday showed GDP fell 0.5% last quarter from the third quarter, when it rose 0.1%.

Companies cut production and stocks and household consumption was static, wiping out gains from exports.

The result was well below forecasts of 0.2% growth and was the first drop since 1991, when the introduction of a sales tax caused a one-off slump in demand.

The Australian economy expanded by 0.3% compared with the same period in 2007, down from 1.8% the previous quarter.