AUSTRALIA risks sinking into recession early next year after a “very disturbing” slide in expectation for economic growth, according to a report from Westpac.

Interest rates are tipped to fall to historic lows after an index measuring future economic activity showed the biggest monthly drop in more than 20 years.

The Westpac-Melbourne Institute leading index, which measures the likely pace of economic activity three to nine months in the future, shrank to 1.1 per cent in September. The drop from August’s 3.5 per cent pace was the biggest monthly fall since the mid-1980s.

Other data out yesterday showed that Australian vehicle sales had suffered the biggest annual slump in seven years. Yesterdays data showed vehicle sales in the year to October slumped by 10.6 per cent, the biggest seasonally adjusted annual slide since September 2001.

Westpac chief economist Bill Evans said Australia was likely to dip into recession early next year, even as households benefited from the Federal Government’s $10.4 billion fiscal stimulus package.

“This is a very disturbing fall in the growth rate of the leading index,” he said.

“It is signalling a very weak growth outlook through at least the first half of 2009.

“It is consistent with Westpac’s view that growth in the first half of 2009 will be barely positive, with a decent risk that the first two quarters of growth in 2009 could be negative.”

The weakness in the global economy and uncertainty over the future economic outlook has seen consumers alter spending decisions.

Westpac expects the Reserve Bank of Australia to slash interest rates by another 75 basis points in December, taking the cash rate to a 6 1/2-year low of 4.5 per cent. Westpac then expectsthe RBA to cut interest rates to 3.5 per cent  “or less”.

Interest rates have not been below 4.25 per cent at any time since the RBA began publishing a target cash rate in 1990.

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