Twelve consecutive interest rate increases, coupled with bearish stock markets, are expected to drastically slash consumer spending. This should cause the economy to virtually come to a standstill, and have an additional 75,000 people in dole queues by the middle of next year.
Any cost will be set off against the China resources boom, and consecutive strong growth among Australia's trading partners in the region.
What is likely to be achieved, however, is for Australia to have a trade surplus next year. The first in 8 years.
Treasury said the blow to consumers from rising interest rate was more severe than before. This was because of the increase in the average level of household debt over the past 15 years.
"In the current situation where interest rates have risen substantially over a long period of time, more people have been experiencing financial stress"
In the past 6 months consumers went on a spending spree, lifting the level of demand growth above 7 per cent. However in the next 12 months this should drop to 2.5 per cent
With lower growth in spending by both commonwealth and state governments Treasury expects the rate of growth to slow to 2.75 per cent by June next year with non farm growth down to 2 per cent Treasury is even gloomier about the growth outlook than the Reserve Bank, which expects non farm growth to be 2.25 per cent by then.
The annual rate of jobs growth which has been averaging at just under 3 per cent and was still growing strongly is forecast to drop to 0.75 per cent at the end of June. This will reverse the trend in the numbers of the unemployed.
Treasury expects the unemployment rate to rise from its recent historic low of 4 per cent to reach 4.75 per cent by the middle of next year.
Despite a widespread shortage of housing Treasury does not expect any revival in housing construction which has been growing by less than 3 per cent a year for four years, and is expected to grow by only 2 per cent for the next two years.
"There is a risk that lower levels of investor activity could put additional pressure on an already stretched rental market" Treasury says noting that rental costs rose by 7.1 per cent in the past 12 months
Consumer finances are also being been buffeted by the 10 per cent fall in the stock market and weaker growth in house prices. "Lower returns and instability in the stock market will increase people's desire to save for precautionary reasons leading to a continued rise in the savings ratio' Treasury says reversing a 30 year decline
It says rising rates and high levels of household debt were encouraging householders to save to protect against further adverse economic shocks.
Treasury says the economy will still enjoy strong business investment in the year ahead while export volumes will rise from a disappointing 3 per cent growth in 2007-08 to 7.5 per cent in the year to June 2009.