The Reserve Bank of Australia (RBA) said on Friday the country's economy will shrink by 1.25% for the year ending June 30.

The RBA revised its GDP forecasts in accordance with Governor Glenn Stevens' statement last month that the economy is in a recession. The Bank said GDP will contract in the subsequent 12 months through June, 2010, with the pace of economic growth now seen at just 0.5%, down from its prediction 1.25% growth next fiscal year.

Australia's recession will be less severe than in many other countries according to the statement released Friday by the Reserve Bank.

The central bank said that a record 4.25 percentage points of interest-rate cuts since September together with government spending will provide significant support to domestic demand.

The RBA said that inflation will slow to 1.5% in the 12 months through June before rising to 2.5% the following year and inflation will cool again to 1.5% in the year through June 2011.

Certainly the risks will continue to be highlighted in the global economy crisis but the key observation appears to expect a recovery that will begin by the end of this year, said Bill Evans, Westpac's chief economist.

“Our region remains the best-performing part of the world economy,” said Mike Smith , the RBA's Chief Executive Officer.

An Australian Bureau of Statistics report showed yesterday that employers unexpectedly added 27,300 workers last month, pushing the unemployment rate down to 5.4 percent from 5.7 percent, the first drop in eight months.

Retail sales rose to 2.2% in March, four times as much as economists forecast, taking the gain in the first three months of the year to 1%, a report showed on May 6. The nation also recorded its second-largest trade surplus on record in March.

“The recovery is expected to be gradual, partly reflecting the slow recovery in global demand,” the central bank said in the statement.

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