Australia: Ripples from the Disaster Reach Down Under

The shift in Australia's outlook shows how the events in the U.S. have changed economic prospects worldwide. Prior to Sept. 11, inflation and the bankruptcy of the nation's second-largest airline were Australia's major problems. Now, the priorities are not so clear.

Australia seemed to have escaped the global slowdown. Real gross domestic product grew 0.9% in the second quarter, up from a 0.4% gain in the first (chart). Interest-rate cuts by the Reserve Bank of Australia (RBA), lower tax rates, and a grant for first-time home buyers boosted demand, especially by consumers. A rebuilding in inventories also lifted growth.

The data for the third quarter have been promising. August payrolls rose by 77,300--the largest gain in more than six years--and the jobless rate dipped to 6.8%. Retail sales looked healthy in July, and a survey of industrial trends turned positive for the third quarter. Private economists expected Australian real GDP to grow 2.3% to 2.5% in 2001, after a 1.5% advance in 2000.

Because of these recent signs of a turnaround, analysts and policymakers were starting to worry about rising inflation in Australia. The official reading of yearly consumer inflation, at 6%, is skewed by the introduction of a goods and services tax in July, 2000. Economists estimate that, excluding the GST, inflation is running about 3%, placing the rate at the upper end of the RBA target. That's why many thought the RBA was finished easing policy, after it had trimmed short-term rates by 150 basis points this year.

The RBA did not follow the Federal Reserve and European Central Bank in cutting rates on Sept. 17, but it may not be able to hold out if the U.S. and euro zone cut again. Given that a U.S. recession will worsen prospects globally and in Australia, the RBA may cut at least once more, even at the risk of more inflation.

Like many countries, Australia is also feeling the personal loss of the disaster: About 90 Australians are dead or still missing at the site of what was once the World Trade Center.

By James C. Cooper & Kathleen Madigan

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