Australia is headed towards recession, according to former Greek finance minister Yanis Varoufakis, who argues that weak domestic investment and the slowdown in China will ultimately put the brakes on growth.

Speaking to Fairfax Media on Monday, the one-time Sydney University economics lecturer said China was crucial to Australia's fortunes, but the world's second-biggest economy was "not at the stage of development where it can continue to defy the global deflationary atmosphere".

Greece's Prime Minister Alexis Tsipras (left) with Yanis Varoufakis in January. Credit:AP

"There will be a recession in Australia, because of the collapse of investment and because of the collapse of animal spirits – and this is because of what's happening in China," he said.

In that scenario, a short, sharp shock would be preferable to the entrenched, or secular, low or zero growth pattern that has taken hold in countries such as Japan.