The economy contracted by 0.5% in the last three months of 2008 from the previous quarter, the government said.

Economists had been expecting it to grow by 0.2%.

If Australia’s economy shrinks again the current quarter, it will enter recession, usually defined as two consecutive quarters of contraction.

Australia’s resource-based economy has been hit hard by the decline in commodity prices, but it has fared better than others.

The country’s mining firms are cutting back on spending, slashing staff numbers, and shelving projects.

“Our economy did contract in the December quarter, but by far less than other developed economies,” said Treasurer Wayne Swan.

“This is a sobering but unsurprising outcome, because I think it does illustrate the full impact of the magnitude of the global recession and how it’s impacting on this country.”

Japan’s GDP dropped 3.3% in the final quarter of 2008, the US saw a 1.6% drop and the UK contracted by 1.5%