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Australia faces a slow haul to recovery

AUSTRALIA’S economy will face ”stiff headwinds” as world growth picks up next year with higher interest rates and cautious consumers generating a subdued recovery, according to Access Economics.

The Canberra consultancy’s latest forecasts predict that the Reserve Bank will lift official interest rates by another 2 percentage points over the next 18 months to two years. This factor, together with the withdrawal of Federal Government stimulus measures and an eventual slowing in Chinese growth, meant the recovery would be significantly weaker than the 5 to 6 per cent growth rates seen after Australia’s 1980s and 1990s recessions.

Access said the economy had held up better than expected in 2009 mainly because consumers had kept on spending, employers had cut hours rather than jobs, and Beijing’s stimulus policies meant China had kept on buying Australian commodity exports.

Spending on household consumption had held up because cuts to interest rates and government cash payments in 2009 had significantly boosted the disposable income of the average family.

But the cash payments had now been spent and the boost to household spending power from lower interest rates was set to be withdrawn.