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Statement 3: Economic Outlook

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Part IV: Uncertainties

From a domestic perspective, a key uncertainty relates to the possibility that the recent downward trend in business and consumer sentiment is sustained over coming quarters. While the relationship between business and consumer sentiment measures and actual growth outcomes can be loose, if the recent falls in these measures were sustained there may be downside risk to the forecasts for business investment and consumption.

On the other hand, there is a possibility that the lower dollar and lower interest rates will provide a greater stimulus to economic growth than has been incorporated into the forecasts. There is also the potential for stronger than forecast investment and consumption in 2001-02 if business and consumer confidence were to rebound sharply from their current levels.

The dwelling sector is expected to rebound strongly in 2001-02, although, there is a greater than normal degree of uncertainty surrounding the timing and extent of this recovery. In particular, while the Government's more generous First Home Owners Scheme and the recent reductions in interest rates should provide a significant boost to activity in the sector, the timing and magnitude of this boost is difficult to assess.

The key international uncertainty is how the US economy will evolve over the next few quarters. The most likely outcome is that growth will slow in the first half of 2001 as excess inventories are unwound and excess capacity is pared back, but will pick up quickly once the adjustment is complete. In this case the impact on the rest of the world would be relatively mild and transitory. However, if falls in consumer and business confidence were to translate into weaker demand then the deterioration in confidence would likely become self-reinforcing and the outcome would be a deeper and more prolonged period of weakness than currently envisaged.

Japan and the non-Japan East Asian region would be adversely affected if a sharp and severe downturn in the US were to occur. The Japanese economy has been weak for some time, unable to gather momentum despite substantial fiscal stimulus. With short-term policy options now limited and unresolved problems in the financial and corporate sectors continuing to weigh heavily on consumer and business sentiment, Japan is exposed to any further deterioration in global economic conditions. Weaker external demand would see a further erosion of confidence and increase the chance that the economy would fall back into recession.

A sharper than forecast slowdown in the US and in Japan would adversely affect several regions, but especially non-Japan East Asia. Asian economies have relied heavily on export-led growth to support recovery over the past few years and are vulnerable to a broad based slowdown in global demand. The Asian economies have also become increasingly integrated with the US economy through the information technology production chain, and are exposed to a weaker US economy through this channel. With several Asian economies facing domestic problems and further progress on structural reforms necessary to strengthen their resilience to external shocks, there is a risk of substantial spillover effects in the region if economic conditions either in the US or Japan were to deteriorate substantially. However, the lower interest rates provide some relief and the gradual decline in oil prices is also helpful for oil importing countries.

A significant slowdown in the US economy, combined with weaker growth in East Asia would result in a more broadly based global slowdown. This would translate into some downside risk to the outlook for Australia's export growth, especially in 2001-02 and hence represents a downside risk to the outlook for Australia's GDP growth in that year.

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