The first fall in economic growth in eight years has flung open the door to further interest rate cuts, but has also prompted suggestions that Australia is already in a recession.
The Reserve Bank of Australia's (RBA) decision on Tuesday to leave the cash rate unchanged raised a few eyebrows after figures on Wednesday showed the economy went into reverse in the final three months of 2008.
The national accounts showed an unexpected 0.5% drop in December quarter gross domestic product (GDP) and led to financial markets pricing in the risk of a 50 basis point rate cut in April.
The economy has so far avoided a "technical" recession after the data also showed that GDP in the September quarter of 2008 was unrevised at a rise of 0.1%.
A technical recession is defined by two consecutive quarters of negative economic growth.
But RBC Capital Markets senior economist Su-Lin Ong believes the economy is "probably already in recession".
"The debate over whether the RBA's decision was the right one yesterday is likely to intensify," she said.
"We think that today's outcome was weaker than (the RBA's) base case scenario and supports further easing."
The non-farm economy contracted by 0.8 % in the December quarter after a 0.2% dip in the previous quarter.
"(That) confirmed that the non-farm economy - 96% of the economy - was mired in recession in the second-half of 2008," Commonwealth Bank of Australia senior economist John Peters said.
The economy grew at an annual pace of just 0.3%, the slowest rate since 1991 when Australia was last in the depths of recession.
Prime Minister Kevin Rudd said it was impossible for the economy to "swim against the tide" of the global recession, while Treasurer Wayne Swan said the result was "sobering but not unsurprising".
"There is absolutely no doubt that things in this country would have been far worse had the government not acted when we did with the economic security strategy announced last October," Swan told reporters in Canberra.
But Opposition Leader Malcolm Turnbull said the GDP figures proved the government's $10.4 billion economic stimulus package had failed to sustain economic growth, and "produced very little bang for the buck".
"Wayne Swan and Kevin Rudd said the $10 billion cash splash in December would create 75,000 jobs. They cannot demonstrate it created one job," Turnbull told reporters in Sydney.
Finance Minister Lindsay Tanner told Sky News the cash handouts to pensioners and low-income families in late December will flow through into the March quarter.
The central bank left the cash rate at a 45-year low of 3.25% following its monthly board meeting on Tuesday, having already slashed the rate by 400 basis points since September.
Prior to the release of the national accounts, RBA assistant governor of economics Malcolm Edey said the measures already taken by policy makers would help promote growth and that the Australian economy had remained more resilient than its major trading partners.
"Australia came into this period with better momentum than most, and with more scope than most to take expansionary policy measures," Edey told the Australian Industry Group annual economic forum in Sydney.
"That scope is being used."
Rudd told reporters in Gladstone the GDP figures reflected the impact of the global economic recession underway in 17 advanced economies.
"Australia cannot continue to swim against the global economic tide," he said.
"Australia can reduce the impact, cushion the impact, of the global economic tide but we cannot stop it altogether."
The largest negative in GDP was from business inventories - stocks on shelves and in warehouses - dropping 1.6 percentage points.
"This sharp rundown occurred as firms cut their stock levels on anticipated paltry sales as the economy eased and consumers retreated into their bunkers," Peters said.
He said private consumption spending - which makes up two-thirds of spending in the economy - rose by a "measly" 0.1%, and made no contribution to overall growth.
At the same time household savings jumped to 8.5%, the highest level since 1990.
Australian Retailers Association director Richard Evans pleaded with consumers to come out of hibernation.
He said consumers are "cashed up" from reductions in interest rates and the government's $10.4 billion stimulus package.
"Most Australians are doing quite well right now," Evans said.
"If they start spending the money again they are likely to save their job."
