Mr Costello remains upbeat on Australia's prospects

Mr Costello warned there could be further pressures to come as the effects of the country's worst drought in more than 100 years are compounded by the fall in visitors because of the Sars outbreak.

"The remaining impact of drought, the largest impact in relation to Sars, will take place in the June quarter," said Mr Costello.

But he insisted the economy would meet the government's 3% growth target for the year to June 2003.

Keeping up

Gross domestic product (GDP) rose a weaker-than-expected 0.7% in the three months to March, leaving annual growth at 2.9%, official figures released on Wednesday showed.

Revisions released on Wednesday also cut growth figures for the previous quarter, from October to December, from 3% to 2.7%.

Despite the downwards revision, the Australian economy is still proving more robust than some of its peers. US annual growth is running at 1.9% while Japan's economy is flat and Germany is on the brink of falling back into recession.

"Against the background of a very weak global economy and the most extensive drought recorded in Australia's history, this is a very solid result," said Mr Costello.

Rate cut?

The farm sector fell by 4.1% in the first three months of the year and Mr Costello estimated production would fall by 28.6% over the full year.

Record sunshine isn't all good news

The slump was offset by strong household consumption and a lift in car sales, although economists said retail sales were affected by fears over the war in Iraq and ongoing drought.

They suggested any further slowdown in growth could lead to a cut in interest rates.

The Central Bank left the official cash rate at 4.75% on Wednesday amid fears that a cut would refuel the housing boom and hit exports.