Economic Outlook

Unemployment levels in Australia are continuing to edge higher in response to the slowing domestic economy, with the unemployment rate rising to 6.8% in March from 6.3% just six months earlier. In addition to weaker household consumption, declining business investment and a collapse in house building activity, slower global growth is feeding through to weaker outcomes in the export sector. The combination ensured that the Australian economy contracted by 0.6% in the December quarter, prompting calls that the nation had slipped into recession.

With external factors turning against Australia and the domestic economy still suffering from the after-effects of the introduction of the Goods and Services Tax, domestic demand needs to be stimulated. And that is exactly what the Reserve Bank of Australia has attempted to do over the last few months, with official interest rates moving 1.25% points lower to 5.00% since the beginning of the year. The central bank is concerned about the international economic outlook and the impact of recession talk on business and consumer confidence. Similarly deteriorating economic conditions in the United States, including significant job losses and a collapse in stock markets, has prompted the Federal Reserve to continue to reduce its benchmark interest rate.

Looking ahead, the downside risks remain and the Reserve Bank will be in no hurry to increase interest rates. While that should allow the domestic economy to improve through the end of 2001, trading conditions will remain tough in the quarter ahead.