By James Glynn and Alice Uribe 

SYDNEY--The developed world's longest ongoing economic expansion is approaching its expiration date.

Australia's 28-year growth streak survived a regional economic crisis in the 1990s, a global economic crisis in the 2000s, and a boom-bust cycle in its core commodity sector in the 2010s. Now, a recession looms after the economy contracted in the first three months of the year, as catastrophic bush fires and restrictions to slow the spread of the new coronavirus took a heavy toll.

Australia's gross domestic product contracted by 0.3% in the first three months of this year from the previous quarter, its first quarterly fall since 2011. Economists expect a steeper drop in activity in the three months through June when swaths of commerce shut down and travel largely collapsed as authorities aggressively tightened coronavirus measures.

On Wednesday, Treasurer Josh Frydenberg said the country was now in recession. "That is on the basis of advice that I have from the Treasury Department on where the June quarter is expected to be," he said. Australia's definition of a recession is two consecutive quarters of negative growth.

In response to the pandemic, Prime Minister Scott Morrison and Mr. Frydenberg rolled out the biggest fiscal stimulus package by an Australian government, including a wage subsidy worth US$48.3 billion to keep more than 1.5 million workers in jobs. Still, more than 600,000 jobs were lost in April alone. The government expects the virus to drive a contraction in GDP of about 10% from peak to trough.

A key question for Australia's leaders is how quickly to withdraw the government help as national infection rates of Covid-19 fall to about 10 a day, enabling many restrictions to be loosened sooner than expected.

Data already suggest a bumpy economic recovery featuring a broad range of winners and losers. Mining companies that dig up iron ore, Australia's biggest export, have benefited from rising prices due to supply disruptions in Brazil and firming Chinese demand. In contrast, other key industries including tourism and education for foreign students remain stifled by closed national borders.

Australia's trade relationship with China is also fraying as Beijing's economy is recovering, worrying business leaders. China buys more than a quarter of everything Australia sells to the world. Two-way trade with Beijing last year was worth about $152 billion, a record, say trade officials.

Australia's call for an investigation into whether any missteps early in the coronavirus crisis contributed to the pandemic has angered Beijing.

China's ambassador to the country, Cheng Jingye, retaliated by threatening a consumer boycott of Australian beef and wine, and of visits to Australia by Chinese students and tourists.

Despite the trade spat, Australia's central bank this week said the depth of the economic downturn could be less than what was earlier expected as restrictions ease. It cut interest rates to a record-low 0.25% earlier this year and began buying government bonds, pledging to keep those measures in place until the job market improves and inflation picks up.

Su-Lin Ong, an economist at RBC Capital Markets, said the speed of recovery will hinge on whether Australia's government extends its stimulus program and how consumers behave in the aftermath of the coronavirus, such as whether they choose to save more. Ms. Ong expects Australia's economy to return to a modest pace of growth, starting later this year.

"The worst, including for the labor market, is likely behind us but the path ahead remains uncertain," Ms. Ong said.

Tomas Rhodes, a 26-year-old British expatriate, illustrates why consumption might not snap back quickly. After leaving a part-time job in a fitness studio in Sydney's beachfront suburbs just before the coronavirus was declared a global pandemic, he recently found work in a bike shop. His girlfriend is also working, but the cost of living remains high.

"We're still going into our savings," Mr. Rhodes said.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

June 03, 2020 05:01 ET (09:01 GMT)

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