AUSTRALIA'S economy is in for a tough year, but it is better-placed than most other leading economies to ride-out the global economic crisis.
That is the message from National Australia Bank Capital senior economist David de Garis, who says the lower $A, the stability of our financial and banking system, and the Federal Government's position of zero net-debt prior to the crisis, would work in Australia's favour.
Speaking to producers at the annual NAB agribusiness breakfast prior to the recent South East Field Days at Lucindale, SA, he suggested Australia slipped into recession in the second-half of 2008.
He forecast another three-to-four quarters of negative growth before a recovery in early to mid-2010.
The full financial effects were still working their way into the system, with unemployment likely to rise 3-4 per cent by the end of 2009.
Australia's economy contracted just 0.5pc in the December 2008 quarter compared with 1.5pc for most Europe economies and Britain.
The hardest-hit was Japan, which contracted more than 3pc, and even China which had 6pc annual growth, was not expected to escape unscathed.
One of the big positives for the Australian economy was the $A being below its long-term average, which had been something of a cushion for exporters.
He said the $A was undervalued and $US overvalued, and the $A was expected to be at US70-US 80 cents in the second half of the year.
Unlike the United States sub-prime mortgage crisis, Australia's financial and banking systems were more stable and the reduction in central-bank cash rates were flowing through to retail lending rates more than in countries such as the US and Japan, which had reached zero interest rates.
"In Australia the Reserve Bank has cut rates by 400 basis points and standard variable mortgage lending rates have come off nearly as much," he said.
"While long-term rates have not fallen as much, much more of the central bank rate reductions had flowed through than in the US where mortgage rates have come off by only 1pc, and mortgage markets in US are still not functioning properly at all."
Australia's official interest rate had fallen 4 percentage points, from 7.25pc to 3.25pc, and while any further rate cuts were likely to be incremental, NAB expected the cash rate might drop to 2pc by the end of the year.
But for borrowers, medium-term (two-five years) interest rates had already factored-in the cash rate dropping to 2.5pc.
He said the government's first-home owners grant scheme and rate cuts had been successful in stimulating the housing market, although it would be tested in the coming six months, and the 30pc investment allowance for small businesses had also found the mark.
The Australian stock market had undergone its largest post-war correction, and while it was not possible to predict whether it would go lower, the stock market tended to reach the bottom at the start, rather than the end, of a recession.
"It is certainly a hugely volatile period that we are living through but it is important in your business to try and distinguish between what the financial market is pricing, particularly if you have any finance or currency decisions to make," he said.
"Those sort of things are priced in ahead of time; what you see in the economy flows through later on."
"There are some positives here in Australia and a few negatives but I am confident by 18 months' time we will be through the worst of the economic situation."
And in good news for agricultural commodity prices, Mr de Garis said the biggest effect on consumption in Britain, Europe and the US was in more discretionary areas such as house and car sales, with less effect on food consumption.
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