NSW is already in recession, and the rest of Australia is hot on its heels, a new forecast to be published today says.
But while collapsing commodity export income would cripple the sun-belt states of Western Australia and Queensland, the worse could soon be over for NSW, which stands to benefit the most from interest rate cuts and a lower dollar.
Access Economics, in its latest quarterly forecasts, predicts Australia will enter a technical recession by the end of March, chalking up back-to-back quarters of negative economic growth.
This is expected to slow the annual growth rate from 3.7pc last financial year to just 0.8pc this financial year, and then rise to 2.4pc the following year.
"This is not just a recession. It will be the sharpest deceleration Australia's economy has ever seen," said a director at Access Economics, Chris Richardson.
With spot market prices for most commodities already depressed to 2004 levels and Chinese growth slowing markedly, Australia had been left with little support for this year, Mr Richardson said.
"Profits might have doubled in the last four years, but we see them halving again over the next two years."
The current account deficit is predicted to rise, from $65 billion this financial year to $100 billion next year, as exports fall faster than imports.
With the international spotlight back on debt, Mr Richardson said a large current account deficit could leave Australia exposed, should other countries prove unwilling to continue lending us the money needed to finance the deficit.
At the same time the federal budget was also in "dire straits", already in deficit and set to go even deeper in the red.
But the biggest budget risk was of "chicken-hearted policymaking" from the Federal Government, if important reforms on education, water and infrastructure were cancelled due to lack of funds, Mr Richardson said.
The good news for NSW residents was that their days at the bottom of the economy heap might be numbered, as weakness infected the rest of Australia.
"The combination of a commodity price collapse and a recession should be a great leveller," Mr Richardson said.
"By 2009-10 most regions in Australia are forecast to be travelling at much the same pace."
A falling dollar would help the state's manufacturers and tourism operators to recover, while tumbling commodity prices would reduce the relative attractiveness of the sun-belt states and help stem the flow of NSW residents leaving the state.
Falling rates would help relieve pressure on mortgage holders, and stagnant or falling house prices could make NSW a more attractive place to migrate to.
"Lower interest and exchange rates mean the preconditions for NSW's eventual economic revival are increasingly in place. We think - finally, finally - the worst will soon be over [for NSW].
However, 2009 was shaping up as a difficult year in NSW, as the economy contracted at "US-style rates".
"NSW is drowning, not waving, and 2009 will be a long year. Pretty much anything that could go wrong in NSW has gone wrong," Mr Richardson said, pointing to finance sector job losses, a too-tough mini-budget, late rains for wheat crops, a stagnant housing market and flagging exports.
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