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Australia to take heavier drought hit
SYDNEY, Australia (CNN) -- Growth in Australia will fall below 3 percent this year as the impact of the long-running drought on farm output is felt, according to a key forecast Thursday. Australia's biggest bank, the National Australia Bank, said it expects farm output to fall 20 percent in 2003, which would cut farm incomes by 80 percent and slice about one percentage point from gross domestic product growth. That estimate of the drought's impact is heavier than other recent forecasts, which have been around 0.75 percentage points. The NAB says GDP growth will likely slip to 2.75 percent this year, before rebounding to 3.75 percent in 2004. It sees interest rates staying on hold until at least mid-year, with the first rise not likely until September. The benchmark cash rate of 4.75 percent set by the Reserve Bank of Australia has been steady since last July. (Full story) Rates on hold
"Given the high level of global uncertainty, signs that the domestic economy is topping out, and the ongoing impact of the drought, we expect the RBA to be on hold for at least the first half of 2003," NAB chief economist Alan Oster said. For the past year, much of Australia has been in the grip of one of the worst droughts on record. There have been heavy livestock and crop losses, aggravated in some places by bushfires that have burnt pastures and farm buildings. The bushfires, a regular occurrence in the Australian summer, have also brought devastation to cities, including the national capital, Canberra, where more than 450 homes were lost in one weekend earlier this month. (Full story) The NAB, releasing its business survey for the December 2002 quarter on Thursday, said consumer spending would slow from 4 percent to about 3 percent by the end of this year, reflecting lower "wealth effects" from the stock market and much more moderate movements in house prices. It said that despite the drought and general expectation of a slowdown, business conditions remained resilient in the fourth quarter. Pickup in exportsA moderate pickup in export growth is seen, mainly in the second half of the year. The NAB said business investment is likely to rise by 10 percent in the 2003-04 financial year. But it stressed that its forecasts were subject to the volatile global economic and political situation, where changes could be radical and rapid. It said the outbreak of a war in Iraq clearly would be "very negative" to the outlook. Australian Prime Minister John Howard has been a strong support of President George W. Bush's hardline stance towards Iraq, and Australian forces almost certainly will join any U.S.-led attack. In line with other regional markets, the Australian stock exchange fell after Bush's State of the Union speech Wednesday. (Bush prompts Asian stock slump) But the benchmark S&P/ASX200 has recovered in Thursday trade, closing up 0.42 percent to 2,964.2. The Australian dollar is trading at 58.78 U.S. cents, with the NAB's Oster saying the currency could strengthen to as high as 62 U.S. cents by mid-2003. "But that is very much a story of U.S. dollar weakness," he noted.
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