The technical definition of a recession is two consecutive quarters of negative growth, and according to consulting firm Access Economics this is what the Australian economy will experience during 2009.

The main factors leading to this unwelcome forecast include a slowing of the hitherto resource hungry Chinese and Indian economies, further job shedding in the financial sector (particularly bad for the CBDs of Sydney and Melbourne) and a fall in manufacturing volumes (which’ll hit the Victorian and South Australian economies relatively hard).

Anyone who’s been paying even scant attention to the financial headlines recently will know that overseas, the credit crunch has evolved into a full blown economic crisis that has shredded consumer and business confidence in the USA, Britain, Western Europe and even once expansionary areas like the Middle East and Asia – ie, pretty much the whole world. Yet there’s good reasons to still think (hope!) that Australia will emerge from this global slowdown in better shape than most.

there’s good reasons to still think (hope!) that Australia will emerge from this global slowdown in better shape than most.

First, and somewhat perversely, the fact interest rates are considerably higher here than most other countries is a cause for relative rejoicing. This is because whereas central banks like the Bank of Japan, US Fed and Bank of England have pretty much run out of monetary bullets to shoot (all their official rates are already close to zero), the RBA still has the option of drastically cutting Australian rates from 4.25% - and assuming the commercial banks pass on these cuts, heavily indebted households will see a handy increase in their disposable cash incomes.

Second, whether by luck or good design, the Federal Government’s budget is in substantially better shape than just about all its global peers. While the resource boom recently ended with something of a thud, the royalties it generated over the past half decade or so helped eliminate Federal debt and generate a substantial surplus. This gives our political masters in Canberra spending options simply not open to other governments, although the manner in which this money is spent (eg tax cuts, pension increases or new infrastructure?) is almost as important as the amounts committed.

Finally, although Australian unemployment has recently begun to rise (and, like Access, I fear it’ll rise further), it is doing so off a base of 4.3% that is substantially lower than most of our international competitors. It may be of little comfort to those who do find themselves without a job, but even if the local rate of unemployment goes to 7-7.5%, Australia will remain a relatively good place to find and hold onto a job.

So if, like most things in economics, a recession is more a comparative phenomenon than an absolute one, Australia should do just fine in the
12 to 18 difficult months that lie ahead.