It’s clear from new reports from the OECD and the IMF that Australia will have the best performing economy among the major economies this year, with an almost V-shaped rebound in 2010.

Growth will slow to to a contraction of half a per cent, before rising to around 1.2% next year. In the domestic economy the situation is even more dramatic. The OCED sees domestic demand falling by a solid 2.1% this year, before bouncing to a growth of 1.4% in 2010. Now that’s hardly anything to write home about in a normal year, but in the present and projected context, it will be a solid recovery. Inflation will be low as well.

And it seems that debt and the deficit may not be as bad as forecast in the recent 2010 budget papers and unemployment won’t be anywhere near the terrible forecasts some economists have made of 9% to 10%. the OECD sees it reaching 7.7% next year, which is less than the recent budget forecasts.

No wonder Federal Treasurer, Wayne Swan went the smirk in a statement today:

The IMF has delivered another clear endorsement of the Rudd Government’s actions to combat the global recession in its Article IV consultation statement released today. This statement provides yet more evidence that the Government’s policy efforts are working to position Australia as among the strongest economies in the developed world.

Well it might have been nice fo Mr Swan to acknowledge the contributions from the Howard/Costello regime, not to mention Hawke and Keating back in the 1980s and 1990’s, to Australia’s current economy position. They built the foundations for the Government and the Reserve Bank to build on; it’s now up to the Rudd Government not to stuff things up.

Both the OECD and the IMF singled out the way the Government and the Reserve Bank had moved quickly to stimulate and protect the economy with spending packages and very rapid rate cuts.

The IMF said:

We welcome the quick implementation of targeted and temporary fiscal stimulus. The stimulus provides a sizeable boost to domestic demand in 2009 and 2010 that will cushion the impact of the global recession. The transfers to households had an immediate impact on activity that helped underpin confidence. The increase in public investment will continue to support activity in the near term, while addressing infrastructure shortfalls.  The downturn has been milder than in most other advanced countries. This is because of strong commodity exports, a flexible exchange rate, a healthy banking sector, and a timely and significant macro policy response.

The IMF also noted the commitment to return the Budget to surplus, saying that “few other advanced economies have adopted such a clear commitment”.

The OECD went further, suggesting more spending could happen and monetary policy could be further eased.

To mitigate the impact of the crisis, the authorities need to maintain the expansionary thrust of their economic policy. Monetary policy could be loosened further. The infrastructure development programme announced in the 2009–10 Budget is welcome and should strengthen fiscal policy impact. To enhance future growth potential, the reform of infrastructure regulations should continue, in particular to ensure regulatory streamlining between States.

Those statements are huge endorsements (albiet with some Government and Reserve Bank input to both studies).

“The international crisis has not spared Australia, even if its impact will be less severe there than the OECD average,” the OECD said.

“Weaker foreign demand and its repercussions on the domestic economy are expected to pull down GDP by ½ per cent in 2009, followed by growth of only 1¼ per cent in 2010.” (The IMF sees growth around 1.5% in 2010).

“In this difficult climate, unemployment could rise to almost 8% by late 2010, while inflation should decelerate.” (Actually the forecast of an unemployment rate of 7.7%, compared with the 5.7% rate in May)

The unemployment forecast of almost 8% by the end of next year is less than many commentators and analysts. It’s also less than the 8.25% forecast by the Federal Treasury in the 2010 budget.

The OECD emphasised the economic outlook was highly uncertain and dependent on international developments, particularly in China. The IMF warned that the risks to Australia’s outlook included a slow global recovery.

And that’s the big question mark. Yes Australia is doing well and looks like it will rebound slowly, (but strongly compared with other major economies). But we are riding on the back of China, where the Government is also throwing money at the economy).

The World Bank has already said a big weakness for China is the absence of any demand for its exports and weak private sector investment. It’s the same in Japan, the US, Europe (Especially Germany) and throughout the rest of Asia. If China stalls next year, there’s just nothing on the horizon that looks like replacing government stimulus spending as a sound and continuing source of demand from next year.

Global trade is still weak, exports depressed and as the European Central Bank showed overnight with its huge injection of money into the the eurozone’s banks, some countries remain fragile and the financial system is not strong enough to stand on its own and resume lending.

In fact apart from Australia where the Government is the main source of stimulus, the US, Japan, the UK and Eurozone has seen Government spending added to stimulus from central banks by way of injections of trillions of dollars of temporary funds to stabilise their financial systems and encourage a resumption of lending.

Australia is in a stronger position because our banks (yes, them) are stronger and better capitalised, and the central government started from a position of surplus.

But that doesn’t disguise the downside risks listed by the IMF (which Mr Swan didn’t mention in his press release). All are equally valid:

Output will likely remain below potential for a number of years, reducing core inflation. The current account is projected to remain in deficit, with net foreign liabilities relative to GDP rising, as Australia will remain an attractive destination for foreign investment, especially in the resource sector.

In our view, risks to the outlook are balanced. On the downside, the world economy could take longer to recover, with significant spillovers to Australia through commodity sector incomes, external demand, and international capital markets. Domestically, a sharper than expected deterioration in banks’ asset quality, possibly stemming from lower house prices, could constrain credit and deepen the downturn.