A shopper browses a rack of blazers at a clothing shop in Sydney on Wednesday.

Australia’s economy unexpectedly shrank in the fourth quarter for the first time in eight years as exports and housing slumped, increasing pressure on the central bank to resume cutting interest rates.

The nation’s currency dropped on concern Australia is now in its first recession in two decades. Central bank assistant governor Malcolm Edey, part of a board that slashed the benchmark interest rate by a record 4 percent to a 45-year low of 3.25 percent before pausing this week, said Wednesday the economy faces more “short-term weakness.”

“The downturn has arrived,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. “The global recession will bear down on Australia’s economy in 2009. There will be more Reserve Bank rate cuts later in the year.”

The Australian dollar dropped to 63.32 US cents in Sydney from 63.78 cents before Wednesday’s report, taking the currency’s decline in the past 12 months to 32 percent. The benchmark S&P/ASX 200 stock index slid 1.4 percent, and is now down 15 percent this year after slumping 41 percent in 2008.

Housing investment fell 1.2 percent, detracting 0.1 percent from growth in the quarter. Exports dropped 0.8 percent, cutting 0.2 percent from GDP. A rundown in inventories detracted 1.4 percent. Consumer spending made no contribution to growth, Wednesday’s report showed.

“There are no quick fixes to the global recession, and many of its effects are yet to be fully felt,” Treasurer Wayne Swan said in Canberra Wednesday.

To stoke household spending, the government distributed A$8.9 billion (US$5.6 billion) in cash handouts in December, helping fuel a 3.8 percent surge in retail sales in that month. Prime Minister Kevin Rudd said last month he would spend another A$42 billion on infrastructure and bonuses to families.

Global rates

Central banks around the world have slashed borrowing costs to try to protect their economies.

The US Federal Reserve’s benchmark rate is close to zero and the European Central Bank will probably trim its main rate today to 1.5 percent, the lowest level in 10 years of setting policy, according to economists.

“The Australian economy has not experienced the sort of large contraction seen elsewhere,” central bank governor Glenn Stevens said Tuesday after keeping the overnight cash rate target unchanged for the first time in seven months. The bank’s earlier rate cuts and government spending would provide “significant support” to growth, he said.

Commodity prices

Commodity exports from Australia, the world’s biggest shipper of iron ore, coal and wool, are forecast to decline in fiscal 2010 for the first time in six years, the Australian Bureau of Agricultural and Resource Economics said Tuesday.

“The international deterioration has been so abrupt that it will not be possible to avoid some short-term weakness here,” Edey said Wednesday.

“Policy makers still have a lot more work to do,” said Ben Dinte, an economist at Macquarie Group Ltd. “The Australian economy is by no means immune from the sharp downturn globally. Investor and consumer confidence remain very fragile.”

Manufacturing contracted at a record pace last month as companies received fewer orders, fired workers and cut production, a report showed this week. Separate reports Wednesday showed demand for services shrank last month and sales of new cars slumped 21.9 percent from a year earlier.

The chain price index, a measure of retail prices, climbed 8.5 percent in the fourth quarter from a year earlier, Wednesday’s report showed.

Source: Bloomberg