The Australian economy continues to perform strongly as it did through the Asian financial crisis and the US recession in 2001

Peter Costello Treasurer

Despite the diminishing strength, the economy still managed to expand by 0.6% compared with the previous three months and by 3.8% compared with the same months a year earlier.

Treasurer Peter Costello blamed the slowdown - which was worse than expected - on falling stock markets and the worsening drought.

Retail spending also fell for the first time in 10 months, while a survey 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.

Top performer

Despite the fall, the growth is still solid in comparison with other developed countries.

Australia has been one of the world's best-performing economies since a negative patch at the end of 2000.

It continued to achieve 1% growth though much of 2001 when the US fell into recession and key European economies stagnated.

"The Australian economy continues to perform strongly as it did through the Asian financial crisis and the US recession in 2001," Mr Costello said.

But the slowdown means that the Reserve Bank of Australia is likely to keep interest rates unchanged at 4.75% when it meets later on Tuesday.