Australia May Avoid Recession on Rate Cuts, OECD Says

By Jacob Greber and Tracy Withers

Nov. 26 (Bloomberg) -- Australia’s economy will avoid a recession next year, helped by lower interest rates, government spending and exports, the Organization for Economic Cooperation and Development said.

Gross domestic product growth will slow to 1.7 percent in 2009 from 2.5 percent this year, before accelerating to 2.7 percent in 2010, the Paris-based group said. Inflation will fall back within the central bank’s target range of 2 percent to 3 percent in 2010.

Reserve Bank of Australia Governor Glenn Stevens has reduced borrowing costs by two percentage points to 5.25 percent since early September in the most aggressive round of cuts since a recession in 1991. The government is also trying to stoke consumer spending by giving A$10.4 billion ($6.7 billion) in grants to families, first-home buyers and the pensioners.

The OECD said its forecast implies that “despite the depressed international environment, the impact of the financial crisis and the fall in the terms of trade should be relatively contained.”

“The expected reduction of inflation due to the current slowdown, along with the need to preserve the stability of the financial system, militates for looser monetary conditions,” the organization said.

The government’s recent spending measures will also boost the economy, “although their effectiveness might be limited if confidence is not restored.”

New Zealand

New Zealand’ economy, already in a recession, will contract 0.3 percent next year, led by a slump in consumer spending and housing investment, the organization said. Income tax cuts and lower interest rates will help buoy domestic demand in 2010, it said.

“The outlook remains subdued because large macroeconomic imbalances such as inflation, housing overvaluation, high household debt and a huge current account deficit will take some time to unwind,” the organization said.

The current account gap will widen to a record 9.5 percent of gross domestic product this year before narrowing to 7.6 percent by December 2009, it said.

New Zealand’s central bank began cutting interest rates in July to kick-start the economy. Monetary policy and the size of the government’s budget surplus put the nation in a good position to cushion the economy’s decline, the organization said.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net