The Rudd government says it's well placed to steer Australia through what are difficult economic times amid mounting speculation the nation could be lurching towards recession.
A string of economic reports over the past week has provided further evidence that the economy is slowing on the back of high interest rates and rising petrol prices.
Figures released last week show growth in retail spending in June was at its weakest in six years, slumping to recession levels, while housing approvals have also fallen.
The weight of evidence supporting a major economic slowdown has some economists forecasting the Reserve Bank could soon embark on a course of rate cuts in an effort to stave off a potential recession.
Financial markets now believe there is a 75 per cent chance that the Reserve Bank, which meets on Tuesday, will cut interest rates by October.
Finance Minister Lindsay Tanner concedes that the economy is slowing, but says speculation that Australia was headed for a recession is premature.
Having talked about the need to take some heat out of the economy, he now says the tax cuts that came into effect on July 1 may be the tonic that's needed to help avoid a recession.
"There are signs that the economy is slowing but there are still lots of strong features of the Australian economy, there's still lots of reasons why we are in good shape compared with all the other major economies in the world," he told ABC television today.
"We had a situation where it was over-heating, where government spending was growing too fast, we had inflation at a 16-year high, the former government was not investing in skills and infrastructure."
"But it's crucial that we don't get spooked by one or two bad sets of figures."
Mr Tanner said the government was confident it had the economic settings right to deal with the challenges ahead.
He said tax cuts, low unemployment and continued demand for resources from China would help keep the economy on a solid footing.
"That will keep the economy ticking along reasonably well in my view."
"Yes the economy is slowing, yes we need to take the steam out of inflation, but people talking recession are getting way ahead of the facts."
Prime Minister Kevin Rudd said it was clear growth had slowed, but maintained that the government was well placed to deal with the challenges confronting the economy.
"We believe that we have a strong economic course of action to take Australia through these difficult global economic times," Mr Rudd told the Nine Network.
Mr Rudd said the government's ability to deal with the prospect of a slowing economy was anchored in a $22 billion budget surplus.
"The nation needs a clear direction," he said.
"That clear direction has to be based on responsible economic management and responsible economic management remains anchored in a $22 billion budget surplus - a buffer for the future."
Speculation about whether interest rates, at their highest level in 12 years, have slowed the economy too much comes amid a new report suggesting the major banks are making gains on the back of the credit crisis.
A new report by InfoChoice says Australian banks are profiteering from customers despite claims by the industry that margins are suffering as a result of a rise in the cost of credit.
The report says the major banks have not only survived but have strengthened their positions thanks to the credit crisis.
"While the recent credit crunch has obviously had a significant impact upon the local money market, there is limited evidence to suggest the costs of funding are still increasing," InfoChoice head of research Steven Anderson said.
