As the US Congress readies itself for several days of heated debate over the Government’s proposed $US700 billion bailout of financial institutions, which would raise the national debt ceiling to $US11.3 trillion, the world financial markets play a waiting game.

AMP Capital Investors’ chief economist and head of investment strategy, Shane Oliver says he agrees with Federal Treasurer, Wayne Swan that the Australian economy is better placed than most to withstand the global financial turmoil.

But he says that the risk of Australia tipping into a recession has increased.

Oliver rates the chance of avoiding a recession at 60%.

This whole issue, he says, “can be viewed as either a half full glass or a half empty one”.

The positives being well regulated banks, a housing under-supply as opposed to an over-supply like America, high commodity prices that are still feeding through to the economy and a number of yet to be completed resource and infrastructure projects.

The downside is an anticipated rise in unemployment as the economy contracts.

The retail sector is already in recession following a backwards slide in the March and June quarters - the worst slump in retail sales since 2000, sparked off by the introduction of the GST.

While Oliver remains optimistic he says that Australia can’t afford to be either confident or complacent.

Coal and iron ore prices have dropped but remain at high levels, which provides a huge buffer and injection into the Australian economy. Conversely Oliver notes that China (our biggest partner in the commodity boom) is experiencing a slowing down of its economy, reflected in the fact that they’ve had to cut interest rates.

“More broadly, the longer the slump continues in the US the greater the risk for Australia,” says Oliver predicting weaker house prices “probably off 5% to10% in the next year”.

“Australian housing is extremely expensive. It’s very unaffordable and we’re going to need big reductions in interest rates before the housing market turns around,” he says.

“But I don’t see a US style crash in the housing market.”

At the front line of the battle against the credit crunch and the deteriorating global outlook Oliver places the Reserve Bank.

“They have to cut interest rates again,” he says. “But what the Federal Government can do, given the massive size of the Budget surplus, is consider more tax cuts and assistance to pensioners and people on welfare to boost consumer confidence.

“I’m not saying that they should do it straight away. But it will have to be thought about.”

If the Reserve Bank cuts rates in October (which he admits is looking increasingly likely) by 25 basis points, he says it’s possible that banks will only pass on 15% to 20% given the fact that the latest turmoil with the US financial markets has meant that the credit crunch has returned with a vengeance and put upwards pressure on bank funding costs.

In the case of that scenario occurring Oliver says that the Reserve Bank will continue to cut rates until the desired level is reached.

“A rise in the unemployment rate over the next 12 months will increasingly become a negative and in the short-term offset the positive impact of lower interest rates,” says Oliver.

He says that the expected rise in unemployment means that Australian households will continue to struggle over the next six to 12 months.

His outlook for the Australian economy is that it will remain pretty soft but he is not pointing his finger at the Rudd Government.

“The lags in economics are long and variable,” he says. “So the rise in inflation was a result of what happened over a year ago.”