Reserve Bank governor Glenn Stevens has insisted Australia is better placed than most countries to defend itself against the global crisis.
He warns against "gloomy talk" on the economy, despite concerns about the possibility of a recession.
Speaking to the Committee for the Economic Development of Australia in Melbourne, Mr Stevens said that until recently he had been thinking that the Australian economy would slow much as it had in 2001.
In that year Australia's economy contracted in one quarter (not two, the definition of recession), meaning that it, along with Canada, avoided the recession that swept through Europe and the United States.
But he said last night that recent international economic and financial events have made him believe that Australia would probably now experience "a more significant slowing than was otherwise going to occur".
However, he believes that a bigger risk — the collapse of an entire financial system with "massive repercussions throughout the world" — is now unlikely.
"Markets are beginning to thaw.
"Actions taken to inject equity are stabilising a situation that could otherwise have unravelled quickly."
He warned: "The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness."
The danger is that households fearful of a downturn are reining in their spending in an attempt to conserve their wealth.
If everyone does that simultaneously it would bring on a "paradox of thrift", making the downturn deeper and destroying more of their wealth.
Fiscal stimulus programs such as Australia's $10.4 billion package would help, but even so, it is important they pass the "good policy" test.
"Poor public policy proposals should not be accepted simply because they are presented as boosting short-term aggregate demand," he said.
After his speech, he indicated that state governments should push on with worthy infrastructure.
"If a project was a good project a year ago, it probably still is," he said.
The guarantees that many countries are offering depositors and banks are helping, but it is imperative that governments sort out details quickly to give markets certainty.
Although the criticism was not directed at any specific country, Australia is yet to finalise the details of the wholesale funding guarantee it will offer banks.
The governor's comments came as Westpac chief economist Bill Evans entertained the "decent risk" of a recession.
The Westpac-Melbourne Institute Leading Index of economic activity slumped to an annualised growth rate of just 1.1pc in September from 3.5pc in August.
"This is a very disturbing fall," Mr Evans said. The September fall was the biggest since the mid-1980s — greater than in the lead-up to the early 1990s recession.
"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," he said.
With PETER KER
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