2012-11-27 09:35:21Roosevelt

Economist warns Australia could face 2014 recession

Australia could face a recession within two years unless the dollar and interest rates fall and major labour market reforms are introduced, an economist has warned.

Saxo Bank chief economist Steen Jakobsen said the mining investment boom was expected to peak in 2013 and Australian authorities needed to do more to ensure other sectors of the economy could pick up the slack.

He said if no action was taken, then Australians could face a recession in 2014.

"You have an excellent starting point, you have the ability to both fiscally and monetarily support and mitigate the effects of this slowdown," the Copenhagen-based economist said.

"If nothing happens, if we have a political vacuum leading to nothing being done next year and the price (of the Australian dollar) remains above where it needs to be then, yes, absolutely a recession is possible."

Political vacuum

Greater workplace flexibility and the abolition of some indirect taxes were necessary to reduce unit costs and making businesses more competitive, Jakobsen said.

But he said with a federal election due in the second half of 2013, such action was unlikely.

"2013 is a huge year in terms of the decisions that need to be taken but there will be a political vacuum until the election is held, which I think is a wasted opportunity," he said.


Jakobsen said the heavy lifting would fall to the Reserve Bank of Australia (RBA), which would need to cut the cash rate sharply to stimulate the economy.

"I think we will have a huge drop in GDP (gross domestic product) in early 2013, everything being equal, but it can be mitigated by an aggressive RBA," he said.

Cash rate

The RBA kept the cash rate on hold at 3.25% in November but futures markets have priced in another half a percentage point in cuts by mid 2013.

But Jakobsen said the RBA might need to cut by as much as 1.25 percentage points within a year.

A cash rate of 2% would encourage consumer spending and would make the Australian dollar less attractive to international investors.

The Australian dollar has spent most of 2012 above the 100 US cent mark but Jakobsen said it needed to be much lower.

"The Australian economy needs an Aussie dollar around 85 US cents to cater for the cyclical downturn and the lack of reforms in terms of creating alternatives to the mining sector," he said.