The Reserve Bank of Australia Friday said the country's near-term economic outcome is likely to be weak, but that a recovery is expected to start by the end of the year.

In its First Quarter Monetary Policy Statement, the RBA slashed its GDP forecast for Q2 to -1.25 percent on year, marking what would be Australia's first recession in nearly 20 years. The RBA said it expects GDP to return to positive by June 2010, and to grow to 3.75 percent by December 2011.

The RBA expects the economy will contract by 1.0 per cent in the fourth quarter of 2009 from a year earlier, down sharply from its February forecast of 0.5 per cent growth.

The bank also lowered its second quarter and fourth quarter 2010 forecasts and expects fourth quarter 2010 gross domestic product growth of 2.0 per cent, down from a February forecast of 2.5 per cent.

Consumption spending has been supported in the first half of 2009 by the government payments to households, but is forecast to soften as the labor market deteriorates, the RBA said. Growth in consumption is expected to return to more normal rates by late 2010 as the economy recovers.

The RBA said business investment was expected to fall significantly over the next year.

Housing construction remains weak, but there are some signs that activity will pick up in the second half of 2009, The RBA statement said. Loan approvals for new construction have increased and a relatively high proportion of households report that now is a good time to buy a dwelling. Borrowing for housing has also increased, particularly by first-home buyers.

The RBA also raised its forecast for underlying inflation for the 4th quarter of 2009 to 3.25 percent from the previously forecast 3.0 percent.

The policy statement and forecast comes just three days after the central bank's policy board decided to leave the official cash rate unchanged at 3.0 percent. The bank noted at the time that monetary policy has been eased significantly, and that much of the effect of the changes had yet to be seen.

In its official interest rate statement, RBA Governor Glenn Stevens said conditions in global financial markets remain generally on a path of gradual improvement, but that credit remained tight.

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