Australian Economy to Shrink 1.25% Before Recovering, RBA Says

(Bloomberg) -- Australia’s central bank said the nation’s economy will shrink 1.25 percent in the 12 months through June before the lowest interest rates in five decades spur a “gradual” recovery next year.

The bank today revised its gross domestic product forecasts in line with Governor Glenn Stevens’ statement last month that the economy is in a recession. The bank said GDP will contract this year before gaining 0.25 percent in the 12 months through June, 2010, compared with its February prediction of 0.25 percent growth this fiscal year and 1.25 percent a year later.

A record 4.25 percentage points of interest-rate cuts since September and government spending will “provide significant support to domestic demand,” the central bank said in its quarterly monetary policy statement released in Sydney. Signs that a recovery may already be emerging include reports this week showing retail sales jumped in March, the unemployment rate dropped and exports to China have surged 80 percent this year.

“They don’t look keen to cut rates again,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “If we see a recovery, inflation will rise.”

The bank said today that inflation will slow to 1.5 percent in the 12 months through June, before accelerating to 2.5 percent the following year. Inflation will then cool again to 1.5 percent in the year through June 2011, it said.

‘Less Severe’

The Australian dollar fell to 75.20 U.S. cents at 1 p.m. in Sydney from 75.38 cents just before the statement was released. The two-year government bond yield dropped 2 basis point to 3.53 percent. A basis point is 0.01 percentage point.

Australia’s recession will be “less severe” than in many other countries, helped by lower borrowing costs for home buyers and businesses, the nation’s healthier financial system, a decline in the currency and “the recent recovery in the Chinese economy,” today’s statement said.

The central bank’s view echoes Australia & New Zealand Banking Group Ltd. Chief Executive Officer Mike Smith, who said Australia’s recession won’t be as “deep or protracted” as other developed economies.

“Our region remains the best-performing part of the world economy,” Smith said in a speech in Brisbane yesterday.

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