KEY POINTS:
John Agostini has just done his bit for Australia. Armed with his own savings and A$21,000 ($26,000) in Government grants, he has bought a new three-bedroom home to be built this year in McGregor, an emerging suburb on Canberra's northern fringe.
Agostini, 23, is one of a nationwide army of first-home buyers that have leapt on the grants introduced as part of Prime Minister Kevin Rudd's A$10.4 billion pump-priming of an economy teetering on the edge of recession.
With other first-timers given A$14,000 to buy established homes, they boosted the value of loans to owner-occupiers by 1.5 per cent in November, applying at least some brakes to a housing market that has been hammered by the global economic crisis.
In the southern New South Wales coastal town of Batemans Bay, lone father Tony Hughes did his bit just before Christmas, spending the A$1000 bonus Rudd distributed to tens of thousands of carers in another bid to buttress Australia against the storm.
Welcome as the series of grants, bonuses and other incentives have been, there seems little chance of averting a further descent this year. While economists and politicians engage in a technical debate over its definition, there is now a broad acceptance that if not already in recession, the lucky country soon will be.
Almost every indicator has assumed a red hue: resources, manufacturing, services, employment, housing and construction, the automotive industry, tourism, retailing, terms of trade - all point to a hard year ahead.
And a hard year for Australia inevitably means more pain for New Zealand.
Australia takes about 20 per cent of our merchandise exports, many of them directed at the sectors now most at risk, including wood, paper and paperboard, machinery and equipment and retail goods.
More Australians than any other nationality visit New Zealand, contributing 16 per cent of total visitor expenditure.
We are huge investors in each other's economy - two-way investment of more than A$113 billion in 2007 - our companies are entrenched on both sides of the Tasman, and bottom lines in New Zealand heavily reflect the health of the Australian economy.
So far Australia has avoided the worst, and there is even some light flitting around the distant end of the tunnel. The economy defied gravity through the Asian meltdown of the late 1990s and - largely buoyed by housing at home and resource exports abroad - powered full steam into the new century.
More than a decade of reforms have broadened and strengthened its base, the financial system remains sound and Canberra has the deep pockets of years of budget surpluses, allowing Rudd more wriggle room than counterparts in Europe and the United States.
He has used this freely, with little fear about returning to deficits. Treasurer Wayne Swan noted before Christmas: "If circumstances were to affect growth to the extent that we would go into deficit, that would be temporary, but it would enable us to make the necessary investments in our economy to strengthen growth and to protect jobs."
This week he reinforced the Government's willingness to add to the more than A$20 billion it has already committed to defence of the economy, including home buyers' grants, pensions and family grants and allowances, the car industry, local government projects, and massive infrastructure programmes.
The Australian dollar has fallen about 30 per cent, boosting exports.
The Australian Bureau of Agricultural and Resource Economics forecasts 2008-09 farm export earnings will rise 7 per cent to almost A$30 billion, pushed by demand for wheat, barley, canola, sugar and other crops.
Interest rates have fallen 3 per cent and may move lower next month.
Retailing's prospects are still grim but Australians, encouraged by the lower rates, cheaper petrol and Rudd's largesse, upped their Christmas spending by 2 per cent over the year before, splurging A$37 billion at the nation's shopping malls.
At least for the moment consumers, who dominate economic activity, are happier. The first Morgan consumer poll of the year found confidence at its highest since last March, and Newspoll reported that the number of Australians worried that they would be worse off in the next six months had dived from 43 per cent to 27 per cent.
That is the good news. The bad news is that business, browbeaten by an avalanche of grim tidings, is viewing the year ahead through an entirely different prism.
Both the Australian Chamber of Commerce and Industry's January survey of investor confidence and Dun & Bradstreet's latest business expectations survey show widespread pessimism.
The ACCI reported that December business conditions and sales were at their lowest since the survey began a decade ago, and profitability at a seven-year nadir.
Expectations for the next six months were even worse, especially for sales, profitability and national economic conditions - also predicted in the Dun & Bradstreet survey.
The reasons for such gloom are not hard to find.
The sudden and dramatic turnaround in the resources sector, largely spurred by contraction in China, is reverberating throughout the economy. Falling world prices - and expectations of worse ahead in upcoming Chinese contracts - have been reflected in mine closures, layoffs, production cutbacks and reports of contract defaults.
Majors such as Alcoa and Rio Tinto have announced sweeping labour and production cuts both in Australia and internationally, with others following suit.
The Financial Review this week reported research warning that mining sector projects worth A$60 billion are now at risk. Job losses so far have topped 3000, with more expected.
Australian Industry Group-Commonwealth Bank performance indexes report the ninth consecutive decline in the services sector, and a similar seventh fall in manufacturing.
"The continued decline in new orders as consumers, the construction sector and overseas markets cut back on demand ... and the ongoing unwinding of inventories suggest that production will ease further over coming months," AI Group chief executive Heather Ridout said.
Housing continues to wallow despite Rudd's incentives, although housing market analyst Residex believes that the sector may be close to bottoming out.
Further declines are expected, but should not exceed more than 5 per cent over the year.
But engineering and commercial construction continues to suffer, hit by a credit drought and reluctance to commit to new orders.
Tourism, a major export earner, is bracing for a horror year.
And the outlook for employment, the harshest measure of economic health, is grim. New statistics released on Thursday show a loss of 44,000 full-time jobs was offset by a surge in part-time work, nudging the jobless rate up from 4.4 per cent to 4.5 per cent.
But most analysts expect the rate to climb to 6 per cent or more as Australia's luck runs out.
Sudden Slump in China sends shockwaves through Australian economy
Australia is fast learning that if you live with a dragon you can be burned.
China's sudden and dramatic slump has seriously holed the nation's firewall against the global economic crisis, hammering its mining sector and accelerating its slide toward recession.
The Reserve Bank says that, driven largely by Chinese demand, coal and iron ore prices tripled in Australian dollar terms over the six years to mid-2008, pushing bulk commodities to 28 per cent of Australia's total exports by value.
China accounted for more than half of Australia's iron ore exports in 2007 and, although not a large importer because of domestic production, can still heavily influence global coking coal prices.
Last November the boom that saw world iron ore prices soar fivefold between 2002 and 2008 collapsed as the Chinese economy shifted dramatically into reverse.
Exports fell more than 2 per cent as demand slumped in the United States and Europe, imports dived by 18 per cent and industrial growth slowed to a 14-year low of 5.4 per cent.
The trend deepened last month, with analysts predicting China will fall short of even its lowered growth target of 8 per cent this year, despite a 4 trillion fiscal stimulus package.
For Australia this means big trouble. The Reserve Bank of Australia notes that market analysts have significantly revised down their expectations for bulk commodity prices, with the next set of contracts expected to be settled at "significant" discounts.
Mining companies have reacted by shedding thousands of jobs - reversing a previously insatiable demand for skills - and are likely to axe more. This week alone almost 600 jobs were lost in the sector.
Mines have been closed, production hauled back in others and expansion plans put on hold.
The Financial Review reported that projects worth A$11 billion have already been deferred or closed, with the total A$60 billion of projects at risk.
