Lucky country has rude wake-up call

The real world began crowding in on Australia as the December quarter national accounts yesterday caught economists by surprise and showed the nation half-way towards recession.

Instead of an expected modest rise in growth, GDP slipped by 0.5 per cent, the nation's first contraction in eight years.

Growth over the 12 months to the end of December fell to a 17-year low of just 0.3 per cent, a performance Treasurer Wayne Swan described as "sobering".

Many economists had predicted some small increase in GDP, helped by a spike in spending before Christmas prompted by the Government's first A$10.4 billion economic stimulus package and Tuesday's Reserve Bank decision to keep official interest rates on hold.

But the nation that rode through the Asian economic meltdown, and revelled in years of growth underwritten by the booming resources sector, has now been exposed to the global crisis.

Assistant Reserve Bank Governor Malcolm Edey said yesterday that after increases of 10 per cent for each of the past five years, growth in Australia's terms of trade had peaked at 20 per cent in the year to the September 2008 quarter.

This was likely to be reversed in the year ahead, he said.

Prime Minister Kevin Rudd said: "Australia can reduce the impact, cushion the impact, of the global economic tide, but we cannot stop it altogether." With the effectiveness of the December package and February's much larger A$42 billion injection coming under increased political attack, Rudd said that anything less would have opened the economy to far greater damage.

The December accounts showed household consumption grew 0.1 per cent in the quarter, with the Government pointing to a 6 per cent increase in gross disposable income as vindication of its package.

But the publication of the accounts has dealt a severe psychological blow to an economy already shedding tens of thousands of jobs, suffering a severe dent to its confidence, watching corporate profit expectations tumble and being warned of worse to come.

The Bureau of Statistics reported that business investment had slowed further in the quarter to 1.1 per cent, further eroding confidence already undermined by the global malaise and expectations of weaker demand and falling profits.

Dwelling investment continued to weaken and exports declined in the face of China's dramatic slowdown and sharp contractions in Australia's other major Asian trading partners.

Shrinking business inventories, manufacturing, wholesale trade and business services also added to the GDP contraction.

There were some bright spots: growth in agriculture, forestry and fisheries, a modest increase in machinery and equipment investment, and growth of almost 2 per cent in non-dwelling construction.

Opposition Leader Malcolm Turnbull said the December stimulus had failed and the Government was mismanaging the economy.

But Edey said Australia was faring better than many other countries, with GDP in Australia's major trading partners contracting by an estimated 1.5 per cent in the December quarter, and was showing more resilience.