Economists don’t ever agree on much, but they certainly don’t agree on the prognosis for Australia’s economy.  A bump in retail-sales data in September gave ballast to the argument that Australia is transitioning away from mining, a sector which is suffering amid weak commodity prices.  But less sanguine observers say the nation is far from making the switch away to a more locally driven economy. Count Morgan Stanley among the naysayers.  On Wednesday, the bank poured a cold warning on any optimism, saying the country may be on track for its first recession in more than two decades—unless the government takes action.  Morgan Stanley revised lower its forecast for economic growth this year to 3.2% from 3.4%. in 2015, it now expects growth of only 1.9%, down from an earlier forecast of 2.5%. That compares with the current central bank forecast of around 3%.  Some economists saw a rise in retail sales in September as signaling that record low interest rates, in place for over a year, are starting to help demand.  Optimists see a property boom in the eastern cities of Sydney and Melbourne as spurring demand, taking up some of the slack as the western-focused mining boom fades.  They also cite a falling Australian dollar, which helps commodity exporters, local manufacturers and retailers, as reason to take hope.  Morgan Stanley begs to differ.  “The economic transition in Australia from the resources boom to east coast recovery has stalled,” it said.  Morgan Stanley says most commentators are underplaying the impact of falling commodity prices on the economic outlook.  The price of iron ore, the country’s biggest export, has dropped 40% this year, and coal also is sliding. An end to an investment boom in mining has thrown many Australians out of well-paid jobs.  The bank notes the Australian dollar’s fall hasn’t kept pace with the decline in commodity prices.  The currency will need to fall to around 0.76 to the U.S. dollar, much lower than just under 0.90 now before it starts to support growth, Morgan Stanley said. It doesn’t expect that to happen until late 2015.  And if this wasn’t gloomy enough, the bank says weak wage growth and rising joblessness will keep a lid on household spending.  Morgan Stanley thinks unemployment will drift toward 7% over the coming year, up from a current 12-year high of 6.2%, making it one of the few commentators to expect things to worsen. The government will release employment data for October on Thursday.  So what should the government do?  The bank urges more rate cuts, from the current record low of 2.5%, and an end to belt-tightening by a government that’s worried about growing public debt.  Morgan Stanley says there’s a 50% chance the central bank will need to further cut rates, despite Gov. Glenn Steven’s public statements that monetary policy has done all it can do.  The current market consensus is for a lengthy period of stable rates followed by increases starting late next year. Still, other observers, including J.P. Morgan Chase & Co., say the central bank may have to further lower rates.  Mr. Stevens has warned that lower rates risk overheating the property market. He’s called on businesses, instead, to start lifting the economy by investing more aggressively.  Meanwhile, Australian Treasurer Joe Hockey has committed the government to new taxes and big spending cuts that politically would be difficult to reverse.  “The last Australian recession was back in 1991,” Morgan Stanley’s economists say. “Avoiding one at this juncture requires a change in policy settings to offer more stimulus. The risk we see is that conditions almost certainly need to deteriorate before this will occur.”  Australia has taken extraordinary steps in the past to boost growth. Over the 1980s and 1990s at various times the country floated its currency, dropped trade barriers, reformed its wage-fixing system, allowed in foreign banks, and granted its central bank independence.  Those radical changes, combined with rising Asian demand for the nation’s resources, helped drive up productivity and create a recession-free period since 1991.  Morgan Stanley says the benefits of those reforms are now looking “exhausted.” The bank called for more government spending on infrastructure to lift growth.  Follow @WSJecon for economic news and analysis Follow @WSJCentralBanks for central banking news and analysis  Get WSJ economic analysis delivered to your inbox:  Sign up for the WSJ's Grand Central, a daily report on global central banking  Sign up for the Real Time Economics daily summary
Morgan Stanley warns of recession in Australia if the government doesn't take swifter action to stabilize its economy.