Experts now say a big rate cut is needed to kick-start economic activity and avoid a deep and harsh slowdown.
The Westpac-Melbourne Institute leading index report, which looks at the likely pace of economic activity three to nine months ahead, showed growth of 2 per cent in June.
The long-run average since 1960 has been 3.9 per cent. The leading index has been below that level for five successive months.
The leading index in June slumped to its lowest point since July 2001, as the share market continued to slide, building approvals remained weak and US industrial production faltered.
It also was significantly lower than Australia's economic growth of 3.6 per cent in the year to March.
Westpac chief economist Bill Evans said weaker consumer spending and home-building activity would add to an economic slowdown into 2009.
"The area of greater softness in the economy is the consumer," he said. "Retail spending and the housing market - the house-building cycle and house prices - will be under pressure."
Westpac expects the Reserve Bank of Australia (RBA) to cut rates by 50 basis points in September from the 7.25 per cent at present . This would be the first easing since December 2001.
Mr Evans said the RBA had historically cut interest rates by half a percentage point at the beginning of the rate cut cycle, as it did in February 2001 and July 1996.
"Once you move, you have to move decisively," he said. "There is a strong case for a cut of 0.50 per cent and it is much safer to move by big steps at the beginning of the cycle because there is less chance of over-cooking it."
Evans thinks the RBA will cut by a full percentage point by early 2009.
However, Shane Oliver, chief economist at AMP, says the index may be under-estimating the downturn.
"We are looking at growth of nearer 1 per cent, which is worrying," he said.
"We need to grow at 3.5 per cent a year just to keep unemployment where it is. Anything less and unemployment rises. Two per cent would be bad enough - 1 per cent even worse."
The minutes of the RBA's August 5 board meeting, released yesterday, suggested economic growth was likely to have slowed in the June quarter, with low growth also possible in the September quarter.
Economists widely expect the RBA to cut rates by 25, rather than 50 points in September because the central bank is worried about near-term inflationary pressures.
