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Economist predicts zero growth rate in December quarter.

MONICA ATTARD: Well, could Australia's longest ever economic recovery be coming to an end? The Reserve Bank was today confronted with evidence showing the economy may be in far worse shape than previously thought.

Right in the middle of its day-long meeting to consider whether to cut interest rates, the bank has been told that retail spending actually fell in the three months leading up to Christmas - the biggest three-monthly fall in 13 years. It's information certain to have had an effect on the bank as it met to consider interest rates and, tonight, it's forced some of Australia's leading financial institutions to revise down their forecasts of economic growth.

Two of them, Westpac and Citibank, are now predicting an economic growth rate of zero in the December quarter.

Here's our economics correspondent, Peter Martin.

PETER MARTIN: An economic growth rate of zero in the December quarter would end 21 consecutive quarters of economic growth in Australia - the longest run of increased income and spending in Australian history. For Westpac, which is making that forecast tonight, today's news on retail spending makes the mathematics compelling.

Chief economist, Nigel Stapleton.

NIGEL STAPLETON: On a reasonable assumption it means that consumption is at best going to be flat in the December quarter, and for statistical reasons we're expecting a contraction in business investment. The underlying trend for business investment is quite solid, but for statistical reasons we expect a pull back, and overall that means that spending in the economy is going to be contracting in the December quarter.

PETER MARTIN: That should give us an economic growth rate of zero for that quarter?

NIGEL STAPLETON: That, in combination with a pull back in stocks in the quarter, partially offset by a positive contribution from the export sector. On balance you're going to get a result pretty close to zero.

PETER MARTIN: Ending the longest run of economic growth in Australia's history?

NIGEL STAPLETON: Potentially, yes.

PETER MARTIN: Does that mean a recession?

NIGEL STAPLETON: I would more describe this as being the worst of the slow down. We've had continuous growth. We'd be expecting growth in the March quarter.

PETER MARTIN: So a technical recession would be two quarters in a row of negative growth. You wouldn't be expecting two quarters in a row?

NIGEL STAPLETON: No, I don't. We're expecting the economy to be picking up a bit in the March quarter and through '97.

PETER MARTIN: Well, the Government's forecast an economic growth rate of 3.5 per cent for the financial year. It renewed that forecast only last week. Does that look achievable on the basis of today's and other recent news?

NIGEL STAPLETON: Well, on the basis of this news it's going to require quite a strong pick-up in the first half of 1997. That's not something we are factoring in. We are factoring in the real strength being in the second half of this year. So we think the risk is that it is going to be at 3 per cent or maybe a touch below.

PETER MARTIN: Bad news for the Treasurer; disastrous news for executives such as wholesaler Solomon Lew, the mainstay of the Coles Myer board; and Frank Lowy, the shopping centre king at Westfield. Both sit on the board of the Reserve Bank and both would have been at the meeting today just before lunch time when the full horror of the official retail news became apparent.

Seasonally adjusted, the volume of goods sold fell 1.3 per cent in the three months leading up to Christmas, the biggest quarterly fall in 13 years. And we're told the bad news was widespread, every single industry group recorded a drop in sales in one or both of the last two quarters, a result so bad that, well, it defies belief. And there are many analysts tonight who simply don't believe that things are as bad as the official figures suggest. It's true those figures will feed in to the official economic growth results, but they mightn't tell the whole story. There may, for instance, have been a big boost in spending post-Christmas at the sales in January. It may be that while Australians are spending less money on things - goods in shops - they are spending more on experiences: gambling, mobile phone calls, that sort of thing.

They are the questions Solomon Lew and Frank Lowy were doubtless asked at today's meeting. Their answers would have helped the Reserve Bank board decide whether to cut at 9.30 eastern daylight time tomorrow morning or to hold on for perhaps another month.

The Bank and dealing rooms around the country are now on standby. The Reserve Bank page on the Reuters Information Service has already been made active. At the moment the words on it refer to the timetable for future statistical releases. If at exactly 9.30 tomorrow morning those words change - the news of an adjustment in interest rates - the cut is on; if not, interest rates will be on hold, most likely for at least one more month.

MONICA ATTARD: Peter Martin reporting there.