The Reserve Bank now believes Australia will escape a recession, having lifted its 2009 growth rate from a contraction of 1% in the May Statement on Monetary Policy, to growth of 0.5%.

In the third statement, released this morning, the central bank says “”The Bank’s central forecast is now for the economy to record modest growth of around ½ per cent over 2009, with growth gradually firming through 2010.”

That means the December quarter contraction of 0.6% in growth could very well prove to be the depths of the slowdown, compared with falls of 2%-5% for some major offshore economies. The economy grew by a surprise 0.4% in the march quarter.

Instead of the May forecast for a fall in GDP of 1.25% in the June year, the RBA now sees the economy as having growing by 0.25%. The June quarter national accounts are out next month.

As the Federal Government’s stimulus spending fades, the impact of the first home buyers driven new housing surge is expected to kick in, and then increased spending on infrastructure.

Along with the sharp, 4.25% drop in official interest rates (and the fact that we are devoted to variable rate mortgages, which makes monetary policy transmission much quicker here than overseas) the huge dose of stimulus from late 2008 onwards has succeeded in cushioning the economy from following other economies into deep recession.

Our closeness to China and faster growing Asian economies, plus the fact that we predominantly export the much-derided commodities, instead of higher value manufactured exports, has meant we have avoided much of the impact of the record 10% plunge in world trade this year.

Our closeness to China might be good luck, but the RBA’s quick rates, the Federal Government’s swiftness in implementing its two stimulus packages and the surprise flexibility shown by employers and employees in limiting job cuts so far, means the Australian economy finds itself in a far better place than other economies.

The bank sees growth slowing growing over the rest of the year and into 2010 where it will be running at 2.25% instead of 2%. Growth in the 2009-10 financial year is now estimated at 1%, instead of 0.5%.

“The economy is forecast to gradually strengthen through 2010 and 2011, with growth expected to be around 3¾ per cent, or moderately above-trend, by the end of the forecast period. In year-average terms, GDP is expected to grow by ½ per cent in 2009/10 and 2½ per cent in 2010/11,” the bank said in the Outlook part of today’s statement.

As encouraging as the new forecasts are, the RBA does see downside risks.

“Investment is expected to decline further over the year ahead, although the level of investment relative to GDP is likely to remain high compared with that in most other advanced economies and with the Australian experience of recent decade.

“Consumption over the second half of the year is also likely to be weaker than in the recent past, as the effects of the recent boost to household income from the government transfer payments fades.”

But then the housing recovery is expected to kick in in the current half of 2009:

“In contrast, stronger dwelling activity and increased public-sector infrastructure spending are expected to provide support to demand. Inflation is still expected to gradually decline, although the expected trough, at around 2 per cent, is higher than anticipated at the time of the previous Statement.”

“Reflecting the slowdown in the economy over the past year, the labour market has softened, although the rate at which unemployment is increasing has slowed recently with the unemployment rate currently at 5¾ per cent, up from around 4 per cent in early 2008.

“Importantly, flexibility in the labour market has allowed many firms and their workers to modify working conditions as an alternative to layoffs. Partly as a result, aggregate employment has shown less weakness over the past year than total hours worked in the economy.

“More recently, the information that has become available suggests that demand and output have strengthened a little, with household consumption continuing to grow in the June quarter while investment has been weak.

“A number of factors have contributed to this comparatively good performance of the Australian economy.

“One is the strong state of Australia’s financial system. Another is the significant monetary stimulus arising from the 4¼ percentage point reduction in the cash rate since September last year, with the lower rates largely passed through to end-borrowers.

“A third factor has been the fiscal stimulus which, in particular, has provided a considerable lift to household disposable incomes over the past nine months.

“The depreciation of the exchange rate last year also provided a stimulus to domestic activity although much of this has been unwound by the appreciation over recent months. Finally, the strong recovery in China, which has boosted commodity prices and demand for Australia’s exports, has also been important.

“While most countries have recorded declines in exports volumes of at least 10 per cent since September last year, Australia’s exports volumes are estimated to have recorded a small rise over this period.”

So, as we found out from the statement issued after Tuesday’s board meeting of the bank, now more rate cuts, but no rate rises, yet.

“The recent stronger-than-expected economic data and the general improvement in sentiment both in Australia and abroad have reduced the likelihood that a further reduction will be required,” it said

“For the time being though, the Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. Over the period ahead, the Board will continue to monitor economic and financial conditions and how they affect prospects for a sustained recovery in the domestic economy, consistent with achieving the inflation target.”