Aust economy largely unscathed by September 11

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Aust economy largely unscathed by September 11

By Eva Brocklehurst

SYDNEY, AAP - One year on Australia's economy appears to have been largely unscathedby the events of September 11.

Consumer and business confidence did take a battering, but recovered with the passage of time.

The currency went into a dive in subsequent days but avoided record lows set earlier in 2001.

And while the Reserve Bank of Australia (RBA) made two cuts to interest rates as "insurance",these were taken back six months later after the economy proved robust.

"Sentiment went so negative post-September 11 - obviously for very good reasons - thatin some ways, reality was always going to be better than perception," Commonwealth Bankchief economist Michael Blythe said.

"The fact that things weren't as bad as expected created a self-reinforcing positivefeedback effect and, I think, sped the turnaround in sentiment before it could do anyreal economic damage."

BT Funds Management chief economist Chris Caton said effects on confidence were significantbut short-lived.

Speaking on a panel discussion about the Australian perspective 12 months on, he said,however, the effects at an industry level were marked and permanent.

"The industry effects are still there - insurance, tourism, the airlines," Dr Caton said.

RBA governor Ian Macfarlane, having cut Australia's cash rate to 4.75 per cent theweek before the attacks, had ruled out any immediate, subsequent rate cut.

"We have, as usual, closely monitored events abroad and at home on a continuous basis,"

he said during a speech in Hobart on September 18.

"We have had better economic data in Australia lately than observed in the United Statesor Europe."

Further actions would depend on how the United States fared, he said.

But it turned out "US stock market crooks" had a greater impact on business confidencethan terrorists, Dr Caton said.

In the weeks following the attacks, the Australian dollar fell sharply and market interestrates plunged as traders searched for signs the RBA would try to avert any economic deteriorationwith a rate cut.

The currency dropped to a post-September low of 48.25 US cents but has since recoveredmore than six US cents.

And the RBA did cut rates again, in October to 4.5 per cent and in December to a 30-yearlow of 4.25 per cent.

But by February 2002 with Australia's economy growing strongly, market talk was abouttaking back those two "insurance" rate cuts.

And the RBA did just that, raising rates by a total of 50 basis points, in May andJune this year.

Mr Blythe said the lack of impact from September 11 was partly caused by good managementby both the government and RBA - and partly luck.

"The good management reflects earlier success in getting inflation down and keepingit down," he said.

"And earlier moves to rein in budget deficits and cut public debt."

As a result, economic policy could be quickly swung in an expansionary direction whenrequired but, luckily, easier rates were already in train.

Other factors which supported Australia's ability to withstand any global recessionincluded a much more competitive currency, its small exposure to the bursting IT bubbleand a surge in housing construction during 2001.

AAP eb/tb/ph

KEYWORD: SEPT11 ECONOMY