Australia has Two Years Before Plunging Into Recession – Economist

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By Esther Tanquintic-Misa | November 27, 2012 4:39 PM EST

Australia has two years to prepare and work on strengthening policies and mechanisms to ensure it won't plunge into a recession.

Steen Jakobsen, Chief Economist of Saxo Bank, said that unless Australia gets its act together, such as fix its escalating interest rates as well as Australian dollar, the resource-rich nation could very well end in the pits as what happened to the other nations in the eurozone.

"You have an excellent starting point, you have the ability to both fiscally and monetarily support and mitigate the effects of this slowdown," Mr Jakobsen was quoted by The Herald Sun.

"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."

Australia has not gone into recession, but there is no mistaking that certain segments of the economy have fallen on hard times, such as closing mines, workers losing their jobs, and yes, people even losing homes due to high mortgages.

The forthcoming federal election in the second half of 2013 pose a hindrance to what could be established for Australia in the long term, such as a more flexible workforce and the abolishment of indirect taxes that would push businesses to become competitive, according to Mr Jakobsen.

"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.

He said the Reserve Bank of Australia (RBA) would need to drastically reduce by as much as 1.25 percentage points the prevailing cash rate within a year in order to stimulate economic activity in Australia.

"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.

A cash rate of two per cent would boost consumer spending, he said.

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