The probability of an interest rate cut in Australia next year has increased, but the chance of a recession is small.
Those are the thoughts of a senior economist at the Organisation for Economic Co-operation and Development.
Commentating on the OECD’s biennial economic survey of Australia, Phil Hemmings says the downside risks for the economy have become a reality with the decline in commodity prices.
“In many ways this adjustment in the commodity market is something that has been expected, but it is the speed and depth that is catching people out,” he told AAP.
And the main risk is more of the same in the coming year.
As such, it poses risks to the OECD’s and the federal government’s growth forecasts and raises the possibility of an interest rate cut.
“But I don’t think that it is a sure thing by any means,” he said.
The Reserve Bank has held the cash rate at an all-time low of 2.5 per cent since August 2013.
The OECD’s survey released on Wednesday is forecasting Australian economic growth of 2.5 per cent in 2015 and three per cent in 2016, similar to those of the Treasury in this week’s mid-year budget review.
Mr Hemmings, who has responsibility for Australia at the Paris-based institution, believes that while the economy faces downside risks it is not about to end 23 years of uninterrupted economic growth.
A recession, as gauged by two quarters of economic contraction, is not easy to see in current projections, he says. However, persistent weakness in the economy could see the unemployment rate even higher than the 6.5 per cent Treasury is now forecasting.
The jobless rate was 6.3 per cent in November.
OECD’S KEY AUSTRALIAN ECONOMIC FORECASTS
2015 – 2.5 PER CENT
2016 – 3.0
2015 – 2.3
2016 – 2.6
2015 – 6.2
2016 – 5.9