Drought hurts Australia's economy

Australia's economy is also feeling the effects of the sluggish world economy, the bank said.

Australia has been one of the world's best-performing economies in the last couple of years, continuing to achieve 1% growth though much of 2001 when the US fell into recession and key European economies stagnated.

"The outlook for the Australian economy remains quite favourable, although growth will be reduced by the impact of the drought on the farm sector," the Reserve Bank of Australia (RBA) said.

Resilient economy

Speaking in parliament, the country's Treasurer, Peter Costello, took gave a similarly cautious prognosis, saying the government's forecast for 3.75% growth this year would be affected by weakness in the world economy, and by drought.

The RBA said there was likely to be "some rebalancing of growth, with domestic demand slowing".

It also forecast export growth would decline, but not as steeply as last year.

The RBA has taken a grimmer view of the impact of the drought than the government, which predicted last month that it would cost the economy 0.75% of its growth target.

Australia's economy has been becoming increasingly sluggish; this year the pace of growth has declined for three consecutive three months periods.

It expanded by 0.6% in the July, August and September three month period, compared with the previous three months and by 3.8% compared with the same months a year earlier.

Retail spending also fell for the first time in 10 months in September.

A survey in September showed business confidence for the last half of the calendar year had slumped.

Business investment and household spending have previously been the mainstay of burgeoning economic growth.