Australia could face a recession within two years unless interest rates and the Australian dollar drop sharply, a prominent international economist warns.
Saxo Bank chief economist Steen Jakobsen warns that with the mining investment boom expected to peak in 2013, Australian authorities need to do more to ensure other sectors of the economy can pick up the slack.
He fears if no action is taken, then Australians could be staring at a recession in 2014.
"You have an excellent starting point, you have the ability to both fiscally and monetarily support and mitigate the effects of this slowdown," the Copenhagen-based economist said.
"If nothing happens, if we have a political vacuum leading to nothing being done next year and the price (of the Australian dollar) remains above where it needs to be then, yes, absolutely a recession is possible."
But federal Treasurer Wayne Swan disagrees.
"This sort of threadbare commentary really doesn't reflect the reality of the resilient Australian economy, which is expected to grow faster than every major advanced economy this year and next," he said through a spokesman.
"The government, the Reserve Bank, the IMF (International Monetary Fund) and many major forecasters expect the Australian economy to grow solidly this year and next, with low unemployment, contained inflation and strong investment."
But Mr Jakobsen's views echo statements from Australian-based economists Su-Lin Ong from RBC Capital markets and Adam Boyton from Deutsche Bank, who have also recently warned a slide in mining investment could leave the economy in a dangerous position from 2013.
Mr Jakobsen says Australia needs a more flexible workforce and indirect taxes should be abolished to make businesses more competitive but with a federal election due in the second half of 2013, he acknowledged action on that front is unlikely.
"2013 is a huge year in terms of the decisions that need to be taken but there will be a political vacuum until the election is held, which I think is a wasted opportunity," he said.
So he says the heavy lifting will fall to the Reserve Bank of Australia (RBA), which will need to cut the cash rate sharply to stimulate the economy.
The RBA kept the cash rate on hold at 3.25 per cent in November but futures markets have priced in another half a percentage point in cuts by mid 2013.
But Mr Jakobsen thinks the RBA may need to cut by as much as 1.25 percentage points within a year.
A cash rate of two per cent would encourage consumer spending and would make the Australian dollar less attractive to international investors.
The Australian dollar has spent most of 2012 above the 100 US cent mark but Mr Jakobsen says it needs to be much lower.
"The Australian economy needs an Aussie dollar around 85 US cents to cater for the cyclical downturn and the lack of reforms in terms of creating alternatives to the mining sector," he said.