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The Australian economy is set to record two quarters of flat to negative growth before resuming its expansion in the final months of calendar 2009.

Economists say falling business investment and rising unemployment will be the major risks for the local economy in the June and September quarters, as the fallout from the global recession continues to weigh.

St George chief economist Besa Deda said Australia’s economy would be weak for at least another three to six months.

“It will be a difficult period, particularly with business investment being pared back,” she said.

“That is one of the biggest risks, along with the prospect of higher unemployment.

“But around late this year, you should see some gradual improvement and that should continue into next year.”

Ms Deda forecasts the economy to shrink in the June quarter, and then to either expand or contract slightly in September quarter before posting a modest lift in the December quarter.

This month, the International Monetary Fund (IMF) upgraded its growth forecasts for Australia to reflect an improved outlook for the economy compared to three months ago.

It now forecasts the economy to contract 0.5 per cent over calendar 2009, before expanding by 1.5 per cent in 2010, against actual growth of 2.3 per cent in 2008 and four per cent in 2007.

The IMF’s outlook is based on the view that substantive action by the Reserve Bank of Australia (RBA) to stimulate demand, while the world economy deteriorated, has been successful alongside the quick implementation of targeted and temporary fiscal stimulus by the federal government.

UBS economist George Tharenou believes the economy can avoid recession – traditionally measured by two consecutive quarters of contraction – due to prompt action by the Reserve Bank of Australia (RBA).

He expect the economy to shrink by 0.6 per cent in the June quarter before growing by 0.2 per cent in the September quarter and the expanding 0.3 per cent in December quarter.

“The key to our view has been the pre-emptiveness of monetary policy,” he said.

Between September 2008 and April 2009, the central bank cut the cash rate by 4.25 percentage points to a 49-year low of three per cent in a bid to cushion the local economy.

“The RBA has already cut rates aggressively …. but we expect the RBA to hold rates now until the end of 2010,” Mr Tharenou said.

Australia’s gross domestic product (GDP) grew by 0.4 per cent in the March quarter – the latest period for which data are available – following a contraction of 0.6 per cent in the previous quarter.

However, National Australia Bank senior economist Spiros Papadopoulos says Australia is not out of the recession woods yet.

He expects GDP to have contracted in the June and September quarters, albeit by small amounts.

“We are talking about small declines of about minus half a per cent in the June and September quarters,” he said.

“But after that, we have positive growth starting to re-emerge, given all the monetary and fiscal stimulus in the pipeline.”

Mr Papadopoulos sees GDP rising modestly by 0.25 per cent in the December quarter.

But as the economy continues to struggle, unemployment is set to rise as firms reduce staff and cut spending.

The 2009/10 federal budget papers point to a rise in the jobless rate to 8.25 per cent by June 2010, before peaking at 8.5 per cent in the following year.

The unemployment rate was 5.7 per cent in April and businesses spending on capital investment fell by 8.9 per cent in the March quarter, official data show.

“If you look at forward indicators like job advertisements and vacancies, they are suggesting that job losses are set to rise, and you have businesses set to cut back on spending activity, and that will cause unemployment to lift,” Ms Deda said.

“By the end of this year, you are looking at an unemployment rate between 6.5 per cent and seven per cent.”

The RBA is still widely expected to cut the cash rate again in calendar 2009, by at least 25 basis points, as the impact of the federal government’s fiscal stimulus fade and the labour market weakens.

It is unlikely, however, the RBA will lift interest rates before the unemployment rate has peaked or neared its peak, given the central bank’s previous actions.

The RBA’s first rate hike following the 1990-91 recession was in August 1994, 20 months after the jobless rate peaked at 10.9 per cent in December 1992.

“Historically, we don’t think they will start hiking before unemployment peaks,” Mr Tharenou said.

“Given the low levels of interest rates we think they will be on hold, we don’t expect them to cut further.”