Banking & Saving - Westpac survey suggests recession still possible

Australians shouldn't feel too confident in terms of the economy, after a leading survey suggests it may not have heard the last of the 'R-word' with a strong possibility it could still be heading for a technical recession this year.

The chief economist at Westpac - Bill Evans, said that although the growth rate was showing signs of “significant” improvement based on figures from the latest Westpac/Melbourne Institute leading index of economic activity, the economy was still veering towards a technical recession.

The figures showed the annual rate of contraction forecast in April was not as severe as in previous months.

According to the survey, April saw a 0.7% increase to the index - down 3.5% for the year.

However, the index – used to predict the pace of economic activity between 3 - 9 months in the future, is still below the long-term trend growth rate of 2.8%.

According to Mr Evans, In February the index had its lowest reading since 1992, but he showed optimism with his predictions that the economy would grow 'modestly' by early 2010.

A recession is usually defined by two successive quarters of negative growth in the economy, as measured by gross domestic product – the total output of goods and services produced by the country.

Mr Evans said in a statement: "Its current pace is still consistent with the Australian economy contracting in the June and September quarters, but if this rate of improvement in the growth rate continues we can look to positive growth in the first half of 2010."

"That profile is broadly consistent with Westpac's own forecasts with the economy contracting by 0.6 per cent in the June quarter and contracting at an annualised pace of around 1.5 per cent in the second half of 2009 before recovering to a growth pace of one per cent in 2010."

Mr Evans added that he expected more rate cuts from the central bank.

"We have recently seen a run of data, including today's leading index, to suggest that the economy, while likely to contract in the near term, can be expected to be entering a period of modest growth from the end of the year

"However, rising unemployment, higher fixed interest rates and likely economic disappointment offshore will continue to make the case for more rate cuts in Australia," he said.

Written by Sam Gooch