Australia is heading straight for a recession.

It might still escape. But that now seems unlikely.

And the Federal government is becoming cagey about what else it might do, to meet this challenge.

The increased risk of recesssion became evident yesterday, when the results of the latest Westpac Melbourne-Institute leading index caluclations were published.

That indicator – for November – stood at -2.2 per cent, well below its long term average of 3.5 per cent.

Three times before, when a similar negative indicator appeared, the Australian economy went into outright recession.

On two other occassions, when the same thing happened, Australia escaped, merely chalking up very slow growth, instead.

Westpac’s chief economist, Bill Evans, was blunt, though, about the likely implications of the latest data.

He said it “…intensifies the risks that the Australian economy will contract through 2009.”

The Statistician also reported yesterday that Australia’s headline inflation rate fell from 5 per cent to just 3.7 per cent, on the December quarter consumer price index figures.

Falling fuel prices took most of the credit for an overall fall of 0.3 per cent in the index, over the quarter.

However, at 3.7 per cent, Australia’s underlying inflation rate is still above the Reserve Bank’s target rate of 2-3 per cent inflation, over the course of the business cycle.

Even so, a substantial cut in the nation’s interst rates can still be expected when the bank’s board meets next Tuesday.

That’s because, as the Treasurer Wayne Swan notes, inflation is no longer the main challenge facing Australia’s policy makers.

That honour has now gone to sustaining the economy and keeping jobs.

Mr Swan is still saying that the government still stands ready to take any extra steps that might be needed, to achieve those goals.

But he was tight lipped, when he met reporters in Canberra yesterday, about when and how the government might act, on these matters.