Employment growth has been moderating in recent months in Australia, with the unemployment rate finishing the year on an upward trend at 6.6%. Both the housing and retail sectors have been hit by the introduction of the Goods and Services Tax and all indications are that businesses reliant on domestic demand will continue to feel the brunt of the economic slowdown in the next quarter or two.

While economic growth has been boosted by a sharp jump in exports resulting from the weak Australian dollar over the last 12 months, a pullback in world production should also feed through to weaker export demand in the year ahead.

The Reserve Bank of Australia should move to lower interest rates slightly in February or March, enabling businesses to borrow at cheaper rates and reducing the interest burden on home buyers. A further rate cut is anticipated in the second quarter of 2001 to further stimulate the slowing economy. However, the extent of the reduction in interest rates by the central bank is likely to be much less aggressive than its US counterpart due to a better growth performance and lingering underlying inflation concerns.

Deteriorating economic conditions in the United States prompted the Federal Reserve to lower the benchmark interest rate by 0.5% point to 6.0% in early January, with the market anticipating further monetary easings in the months ahead.