The Australian economy will recover in 2010 but it will be a slow comeback as the federal government withdraws its stimulus spending and interest rates continue to rise, an economic forecaster says.

A labour market rebound is also expected to be sluggish.

An Access Economics business outlook report released on Wednesday predicts an improvement in the Australian economy in 2010 and 2011 - with a catch.

The recovery will be slower than the aftermaths of the early 1980s and early 1990s recessions.

“Withdrawal of stimulus will hit harder than most realise - the cash splash has passed and interest rates are amid a return to `normal’,” the report said.

Consumers would stay in “low gear” as rates rose, it added.

Pressure on the government to cut back on spending would become “increasingly clear”, Access Economics director Chris Richardson said.

“The government will have to cut back its spending as interest rates rise,” he told AAP.

“It shouldn’t only be stimulus spending, it should be all spending top to toe.”

When it comes to predicting the medium-term future, Access Economics is actually more optimistic than Treasury.

It expects 3.2 per cent economic growth in 2010/11, compared with the government’s more modest 2.75 per cent expansion pace for the same period.

Access Economics also has a more upbeat view on the labour market.

It sees the jobless rate peaking at 6 per cent in 2010 - a figure lower than Treasury’s 6.75 per cent prediction.

But the unemployment level could take another two years to stabilise at the present level of 5.5 per cent, Access says.

“Unemployment is close to its peak already, but as population growth and migrant numbers may remain relatively high, the job growth in 2010 and 2011 may be slow to peg the unemployment rate back again,” it said.

Interest rates are expected to keep rising in 2010 and 2011.

Following three consecutive rate rises at the end of 2009, the cash rate has risen from a 49-year low to 3.75 per cent.

By the first half of 2011, interest rates could hit 5.5 per cent for the first time since late 2008, Access predicted.

Looking at the states, Access is worried about the effects rising interest rates will have on the NSW retail and housing sectors, which benefited from rate cuts in early 2009.

With Queensland’s construction sector and labour market struggling, the sunshine state was not expected to see a turnaround until 2011.

Victoria was viewed as Australia’s standout state, on the back of a resilient retail sector and a nation-leading housing sector.

Resources-rich Western Australia was expected to recover, albeit at a more modest pace compared to the height of the mining boom.

While South Australia is struggling, strong population growth was tipped to help the state recover after 2011.

Consumer spending was expected to drive an eventual recovery in the Tasmanian economy.

Mr Richardson says there’s a good reason why this recovery will be slow.

“We didn’t have much of a downturn in the first place,” he said.

“There’s slack in the economy but it’s nothing compared to the recessions of the early `80s and `90s.”

AAP