US attacks eclipse strong GDP in rate outlook

The terror attacks in the United States will overshadow the strong June quarter growth performance by the Australian economy in determining the outlook for interest rates.

This raises the possibility of further rate cuts in Australia, perhaps not immediately, but in coming months.

While the GDP figure of 0.9 per cent released today confirms recovery was proceeding apace in Australia at the end of the financial year, the shock to the US and world economy that will flow from the attacks on New York and Washington adds significantly to the fears of economic downturn in the US that would inevitably drag a weak world economy with it.

A further US interest rate cut was already largely expected by October and is probably now inevitable given the hit the US economy will take from lower business and consumer confidence, financial markets either closed or volatile, falling share prices, higher oil and commodity prices and the negative effect on specific industries such as insurance and transport.

On the domestic front, the quarterly GDP rise of almost 1 per cent shows the Australian economy, despite full year growth at a low 1.6 per cent, chugging along at an annualised rate of 3.6 per cent in the June quarter. This was on the back of healthy consumer spending, booming exports, a strong construction sector, a solid manufacturing performance and a build-up of inventories.

This picture completes the recovery scenario however the RBA has already signalled it is concerned about the external threat to our recovery in cutting rates again last week.

Depending on how events pan out in the aftermath of the attacks on the US, there may well be a need for further rate-cut stimulus now that the international economic threat to Australia has this significant added dimension.

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