Aust economic index at 26-year low

SYDNEY - Australia's economy is set to keep contracting to a recession, with the rate of growth at a 26-year low in a leading survey.

The Westpac/Melbourne Institute leading index, which signals the likely pace of economic activity three to nine months in the future, shrank by 5.1 per cent in February.

It was the lowest rate of annualised growth since September 1982.

February's result compared to a downwardly revised fall of 4.8 per cent in January and a February annualised growth rate of 0.7 per cent.

Westpac chief economist Bill Evans said the deterioration of the growth rate of the leading index was "truly remarkable".

"For some months the index has been signalling that the Australian economy will enter a recession," Evans said in a statement.

"The consistent run of negative reads for the growth is comparable with Australia's previous recessions which began in 1961, 1974, 1982 and 1990."

Evans said the annualised growth rate of the index during the previous recession in 1990/91 stayed negative for 20 months in a row where it reached its low point of minus 3.7 per cent after 12 months.

"In this cycle the growth rate first went negative in October last year and deteriorated to minus 5.1 per cent in this February reading," he said.

"During that earlier recession the low point for the Australian economy was 1991 when the economy contracted by 1.3 per cent.

"Westpac is currently forecasting that the Australian economy will contract by one per cent in 2009 which we expect to be the low point of the cycle."

However, the current recession will have a lower impact on the Australian economy than the previous one due to pre-emptive measures from the federal government and the Reserve Bank of Australia (RBA) in comparison to the efforts by authorities in the early 1990s, said Evans.

But global economic conditions were more worrying currently than in the early 1990's, Evans said.

"The low point of world growth in that period was 1.5 per cent in 1991 whereas we expect the world economy to actually contract by one per cent in 2009, the first time since World War 2," he said.

"These qualifications nevertheless emphasise that both monetary and fiscal policy still have much more work to do.

"It would be a mistake for the monetary and fiscal authorities to assume that enough work has been done given this extremely dangerous global economic environment."

Evans expects the central bank to keep interest rates on hold when its board next meets on May 5.

Between September and April, the RBA has cut the cash rate by 425 basis points to three per cent, a 49-year low, in a bid to cushion the local economy from a possible recession.

"Given the importance of rate cuts in boosting confidence we expect the bank will see the need to have ample capacity to be cutting rates through the second half of 2009," he said.

"The economic case for cutting rates is undeniable.

"The issue is really only about tactics."

- AAP