Dramatic events both domestically and internationally have occurred in the last quarter to significantly impact on the economic outlook and the interest rate environment.

Looking at the historical data, the Australian economy grew by 0.5% in the June quarter, but was just 1.4% stronger than a year ago. The quarterly growth was assisted by continued buoyancy of household consumption in a relatively low interest rate environment, business inventory build-up and further demand in the housing construction sector. The trend over the past few quarters seems to be a shift away from investment in securities towards bricks and mortar, with house prices surging higher as a result.

Unemployment remained mostly unchanged in the September quarter, a reflection of the weaker economic conditions experienced earlier in the year. The unemployment rate is currently sitting at 6.8%, significantly higher than the 6.0% level struck late in 2000. All indicators are pointing to further weakness in the labour market, albeit at a slow pace of decline.

Looking ahead, the terrorist attacks on the United States will have a profound impact on the international economy and therefore the Australian economy. The attacks have dampened spending in the US economy, with preliminary retail data also indicating a direct impact on spending in Australia. With international economic conditions set to deteriorate in coming quarters, export demand will weaken and place even more downward pressure on the Australian economy.

The tourism industry will also experience a significant downturn in trading activity in coming quarters following the collapse of Ansett Airlines and the postponement of the Commonwealth Heads of Government Meeting (CHOGM). The indirect effects of these domestic shocks will be significant, particularly in those areas reliant on tourism (e.g. Queensland).

The combination of domestic and international shocks to the economy have seen the Reserve Bank of Australia continue to cut official interest rates to 4.50%, although not to the extent of the dramatic rate reductions being experienced in the US. The risks to the economy now lie to the downside and further interest rate cuts are not out of the question, with the US Federal Reserve expected to continue to ease monetary policy in light of recent shocks and the likelihood of recession.