The economic outlook in Australia continues to be dominated by the race to deleverage (reduce debt).

Recent data from the Reserve Bank of Australia (RBA) shows annualised credit growth of just 1.5% over the three months to February 2009. Over this same period, business and personal credit declined, and lending for residential property investment is barely growing. It is only housing credit to owner occupiers that is experiencing strong growth.

Policies are helping to moderate the pressure to deleverage by boosting household income and cutting interest payments. In particular, the household debt service burden has been cut by around 5% of household disposable income.

The improved risk appetite in markets continues to be well supported by economic developments with signs of a turning point in global manufacturing and encouraging recent global policy announcements such as G20 and changes to market rules in the US.

In its April meeting the RBA caught the majority of the market off guard, when it opted to cut official interest rates by 0.25% (25bps) – going against market expectations that rates would be either left on hold or reduced by 0.5% (50bps).

RBA commentary focused on the scale of monetary and fiscal stimulus to date, and the tangible results of this currently being witnessed in lower lending rates and a pick-up in housing finance. Mention was also made of improvements to risk conditions and sentiment in the broader global market and the progress the US is making in getting its financial house in order. Nonetheless, the Reserve also noted that "most assessments of the near term outlook have been further marked down… Sentiment remains fragile".

Citi analysts believe the RBA’s 0.25% rate cut represents part of a finetuning process rather than a significant shift in base policy, and it may be that the end is in sight for interest rate easing. On this basis, Citi analysts anticipate that local rates will reach a low point of 2.75% in the September quarter of 2009 though movements in both credit growth and unemployment are likely to be the key indicators of possible future rate movements. The federal government’s May budget will almost certainly announce further fiscal stimulus centred around a significant expansion of infrastructure spending.

Citi analysts believe the March sharemarket rally could relapse, with the market likely to reach new lows around July/August in line with the corporate results season, which is likely to indicate cuts to 2010 numbers.

Beyond this, Citi analysts expect significant share price rises in late 2009 and throughout 2010 as the downturn in the earnings cycle becomes history, and good value gains the upper hand in the battle between momentum and value. That said, Citi analysts put the chances that we are already past the sharemarket lows at around 10% to 15%.