"Our base case now assumes a material growth slowdown, in conjunction with greater than expected deterioration in labor market conditions," Morgan Stanley said.
Read More Australia's economy: from mining to building
"Unless the monetary and fiscal backdrop turns more stimulatory, Australia could well face its first recession in a quarter-century," the note said.
The bearishness is at odds with relatively benign economic data recently. The Australian economy added 24,100 jobs in October, better than the 22,500 forecast by Reuters, after two months of declines, data showed Thursday. Earlier in the week, retail sales data for September came in better than expected, rising 1.2 percent from August, indicating consumption hasn't faltered.
In its quarterly policy statement released early Friday, the RBA kept its growth forecasts unchanged, forecasting 2.5-3.5 percent growth for 2015 and 2.75-4.25 percent for 2016. The central bank expects declining mining investment will subtract 1.5 percentage point from GDP in 2015.
But Morgan Stanley isn't alone in its below-consensus forecast for economic growth.
"The next couple of years will see mining investment drop quite sharply," said Daniel Martin, an economist at Capital Economics. "That was the real driver of Australian outperformance during the Global Financial Crisis. It was the driver for much of the last decade."
Read More Have the Aussie dollar bears won the argument?
He's been forecasting economic growth would fall to 2 percent next year, adding he doesn't believe consensus expectations for 3 percent are realistic.
"So far, there's not enough signs that the rest of the economy has made up enough to counter [the mining-investment dropoff]," he said. "Households still have a lot of debt. They don't seem to be very eager to spend."