Wall Street bank Goldman Sachs yesterday warned that the risk of a recession in Australia is higher than at any time since the global financial crisis, while announcing cuts to its growth forecast for 2016 and pointing to the potential for another two interest rate cuts by the Reserve Bank. 
Goldmans put the risk of recession at about one in three, saying weak commodity prices, falling investment, government budget cuts to rein in deficits and slowing population growth will erode growth.
"A recession is not some remote probability; it currently stands at the greatest probability since the financial crisis," Goldmans said in its report.
Recent discussion about a coming recession is already, in some ways, academic in some respects, as national income has dropped in line with falling commodity prices, a factor that is crimping profits, wages and government revenues.
"On some important measures the Australian economy is already contracting," it added. National disposable income fell 2.3 per cent on-year in the second quarter, it said.
Data last week showed Australia's economy grew by just 0.2 per cent in the second quarter and 2 per cent from the same quarter a year earlier, its weakest pace in four years. Concerns about an economic slowdown were later compounded by data showing month-to-month retail spending falling for the first time in more than a year in   July.
A recession in Australia would be its first in close to 25 years, and concerns have deepened as other economies reliant on resource income, such as Brazil and Canada, are now seeing their economies contract.
Goldman Sachs said it now expected GDP growth of just 2 per cent in 2016, down from an earlier forecast of 2.25 per cent, adding that the Reserve Bank might need to lower interest rates, already at a record low of 2 per cent, two more times.
"We believe the risk of a further cut (beyond the one already forecast) is high should the domestic banks indicate that they will not pass through the full extent of any monetary easing," Goldman Sachs said.
The economy has been battered in the past year by sharp falls in key commodity prices such as iron ore and coal. The Australian dollar remained stubbornly high for some of that period, adding to the headwinds for growth.
Goldman Sachs added that the Australian dollar, already down by more than 25 per cent against the US dollar in the past year, would fall to a trough of US67c by the end of the year, 6 months earlier than it previously expected.
Australia's central bank moved to push back on some of the gloom this week, with Deputy Governor of the Reserve Bank Philip Lowe saying the economy is growing solidly.
"Recent indicators are also consistent with a moderate expansion in the Australian economy," he said.
Still, Mr Lowe noted that a downturn in mining investment, which follows a decade-long boom that peaked around four years ago, is still only halfway over.
Treasurer Joe Hockey has also rejected the idea of a recession, saying Australia had to continue to work toward freer trade.Dow Jones Newswires