Interest rates are tipped to fall to historic lows after an index measuring future economic activity showed the biggest monthly drop in more than 20 years.
The Westpac-Melbourne Institute leading index, which measures the likely pace of economic activity three to nine months in the future, shrank to 1.1 per cent in September.
The drop from August's 3.5 per cent pace was the biggest monthly fall since the mid-1980s.
September marked the second successive month the index was below the long-term trend of 3.9 per cent after slides in the Australian share market, US industrial production and housing approvals.
Other data out yesterday showed that Australian vehicle sales had suffered the biggest annual slump in seven years.
Westpac chief economist Bill Evans said Australia was likely to dip into recession early next year, even as households benefited from the Federal Government's $10.4 billion fiscal stimulus package.
"This is a very disturbing fall in the growth rate of the leading index,'' he said. "It is signalling a very weak growth outlook through at least the first half of 2009.
"It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive, with a decent risk that the first two quarters of growth in 2009 could be negative.''
Meanwhile, Australian Bureau of Statistics data out yesterday showed vehicle sales in the year to October slumped by 10.6 per cent, the biggest seasonally adjusted annual slide since September 2001.
CommSec chief economist Craig James said the yearly decline was a sign of falling share prices and wealth levels.
"The weakness in the global economy and uncertainty over the future economic outlook has seen consumers alter spending decisions,'' he said.
Westpac expects the Reserve Bank of Australia to slash interest rates by another 75 basis points in December, taking the cash rate to a 6 1/2-year low of 4.5 per cent.
Westpac is expecting the RBA to cut interest rates to 3.5 per cent "or less'' - dramatically lower than the 4.25 per cent level hit in the aftermath of the September 2001 terrorist attacks in the US.
Interest rates have not been below 4.25 per cent at any time since the RBA began publishing a target cash rate in 1990.
Japan and the 15-nation Euro zone are already in recession, with the RBA indicating it is worried about the effect on Australia.
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