Australia faces first recession since 1990

Sydney: Australia's economy, which cruised through the 1997 Asian financial crisis and the dot-com bust, is facing the prospect of its first recession in almost two decades.

Waning global demand for commodities threatens to staunch a five-year flood of export earnings that helped boost Australian incomes by the most in more than 30 years. Without shipments overseas, the economy would have contracted in the second quarter.

China's performance may be the key to whether the economy shrinks: A slowdown in Australia's fastest growing export market would hurt shipments of iron ore, coal, copper and cotton. Treasurer Wayne Swan said this week Australia may be hit harder than expected as the global slowdown spreads to the emerging markets that are among the nation's main trading partners.

"It'll be no mean feat for Australia to stay out of a recession," said Rory Robertson, an economist at Macquarie Group Ltd in Sydney. "Consumers and business are hunkering down across the world, almost as we speak, shocked to the core by the financial dislocation."

Australian business confidence plunged last month to the lowest since National Australia Bank Ltd began measuring sentiment in 1989, the bank said today.

"Fear reigns supreme," said Alan Oster, chief economist at National Australia in Melbourne. "Share market declines, falling commodities and continuing talk of global recession have finally broken business optimism in Australia," he said.

The benchmark S&P/ASX 200 Index of stocks sank 4.4 per cent at 11:46am in Sydney yesterday, taking its slump for the year to 38 per cent. The Australian dollar has dropped 32 per cent since reaching a 25-year high of 98.49 on July 16.

Central bank Governor Glenn Stevens responded to the threat with the most aggressive round of interest-rate cuts since a recession in 1991, slashing the benchmark rate by 2 percentage points to 5.25 per cent in nine weeks.