NEW data point to an increased risk that Australia will follow other major economies into recession early next year, after 17 straight years of economic expansion.
The index, which indicates the likely pace of economic activity three to nine months into the future, is well below its long-term trend of 3.9 per cent.
The index stood at 3.5 per cent in August.
"This is a very disturbing fall," Westpac's chief economist Bill Evans said.
The fall in September was the largest month-to-month percentage point fall since the mid-1980s - even sharper than in the 1990-91 recession - and points to a very weak growth outlook for at least the first half of 2009.
"It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative," Mr Evans said.
Mr Evans said this will be partly because the first quarter of 2009 is likely to show negative growth compared with the final quarter of 2008, which will get a "one-off" boost from the government's fiscal stimulus package.
Pensioners, carers and low-income families are due to get $8.4 billion of the package on December 8 in one-off payments.
An economy is deemed to be in recession when it posts two consecutive quarters of negative growth.
As such, Mr Evans expects the Reserve Bank of Australia will cut the official cash rate by a further 75 basis points to 4.5 per cent when the central bank's board meets on December 2.
Mr Evans expects the cash rate to fall eventually to 3.5 per cent or lower.
AAP
