Australian economy shrinks 0.5%

Australia's economy is heavily resource based

Australia's economy has shrunk for the first time in eight years, raising fears that the country may be heading for a recession.

The economy contracted by 0.5% in the last three months of 2008 from the previous quarter, the government said.

Economists had been expecting it to grow by 0.2%.

If Australia's economy shrinks again the current quarter, it will enter recession, usually defined as two consecutive quarters of contraction.

Australia's resource-based economy has been hit hard by the decline in commodity prices, but it has fared better than others.

This seems to be the recession that Australia could not avoid Nick Bryant, BBC Sydney correspondent Read Nick's blog

The country's mining firms are cutting back on spending, slashing staff numbers, and shelving projects.

"Our economy did contract in the December quarter, but by far less than other developed economies," said Treasurer Wayne Swan.

"This is a sobering but unsurprising outcome, because I think it does illustrate the full impact of the magnitude of the global recession and how it's impacting on this country."

Japan's GDP dropped 3.3% in the final quarter of 2008, the US saw a 1.6% drop and the UK contracted by 1.5%.

Nick Byrant, the BBC's Sydney correspondent, said that back in September, Australia had hoped to duck the worst of the global recession, but this no longer looked possible.

"After surviving the 1997 Asian financial crisis and the 2000 dotcom bubble, Australia had hoped to complete the impressive hat-trick of not being forced into recession by the global financial crisis," our correspondent says.

"But given the turmoil elsewhere, this seems to be the recession that it could not avoid."