the gst was to bring about a fall in house - building in the second half of 2000 that was much bigger than anyone had forecast or we had ever previously experienced ( graph 1 ). while house - building only comprises 5 per cent of gdp, its fall of 37 per cent in two quarters was enough to outweigh reasonably healthy growth in the other 95 per cent of the economy, and so produce a contraction in gdp for the half - year. there were other factors at work as well, for example, the rising oil price, and there were other parts of the economy that were affected, for example, the labour market. but the figures clearly show that the fall in house - building subtracted 2. 2 percentage points from the half - year ’ s gdp growth, and hence accounted for the overall contraction in economic activity ( graph 2 ). this was a transition effect of the gst, which would soon reverse, and therefore should, in principle, have no effect on our average prospects over the medium term. the problem with transition effects, however, is that they can affect people ’ s confidence and their expectations because at the time no - one can be sure they are transitory. this happened on this occasion as business confidence fell, although not precipitously, over the second half of 2000. when the decline in gdp was revealed in early march, confidence took a sharper turn for the worse. not only did business confidence fall further, but consumer confidence and the exchange rate joined in, and the share market did not escape without damage. this was a period of considerable gloom, when some observers went so far as to suggest that australia might talk itself into recession. in terms of the two components of our view, the second seemed to have completely eclipsed the first, and you could be forgiven for believing that there was no longer any substance to the first view. what we now know is that at precisely the time that confidence was reaching its low point – the march quarter of 2001 – the transitional effects were dropping out of the calculations and the economy was returning to reasonable growth. the march quarter national accounts show this clearly, and a range of other indicators show a distinct improvement from their march low point ( graph 3 ). · consumer sentiment, although declining in the second half of 2000, had remained above its long - term average until it fell sharply in march. it has now regained a level above its long - term average. · the share market has been generally very buoya

##nt by world standards, but fell by 6 per cent in march before recovering in april and may. · the exchange rate reacted to the weak economic activity news and reached a low point in early april. it subsequently rose by 7 per cent against the us dollar and in trade - weighted terms. · there is evidence from a number of business survey responses to questions about the economic outlook that confidence has improved. 4. where does that leave us? my assessment is that we are now back in a position where the first view represents a good summary of our position. the major threat to our future growth prospects now comes from the international economy, not from domestic factors. the list of domestic factors which provided underlying resilience a year ago still applies. and we could add to that list the fact that monetary policy and fiscal policy have both moved in an expansionary direction since then, and that the exchange rate continues to provide stimulus to the internationally traded sector. before moving on to discuss the world economy, i would like to touch on one further question pertaining to the domestic economy. the question is the following : does the fact that we had such a poor second half of 2000 put us in a worse or a better position to handle any future weakness in the world economy? on the surface of it, you might be inclined to say that it has made things more difficult for us because it has given us a weaker starting point. on the other hand, you could mount a defensible case that it may help us in the medium term. first, we have now got some of the usual cyclical contractionary forces behind us, which in a more normal business cycle we might still be facing. the housing contraction is the most obvious of these, but the inventory cycle has also been probably brought forward and therefore may be already half completed. second, the greater and earlier - than - expected weakening of the domestic economy focussed the attention of policy makers on the need for easing somewhat earlier in the process than if the cycle had had a more normal shape. on monetary policy it is hard to be definite on this point, because other important factors were also at work – for example, the recognition that the international cycle was turning and that inflation remained low – but, at the margin, the weakness in the second half of 2000 contributed to an earlier easing. on fiscal policy, the increase in the first home buyers ’ grant is an example. finally, the perception of weakness in the australian economy probably contributed to holding down the value