Though we remain relatively sanguine on the prospects for the Australian economy, we believe that widening market optimism has now pushed the consensus macro view out of step with reality. As such, we continue to forecast a full-year contraction of 0.8% in 2009, an improvement from our previous forecast of -1.2% growth, but still below the consensus view of -0.3%.

Australia’s international deployments in Iraq and Afghanistan, and public alignment with the US, have made it a target for Islamic terrorists. As yet, there have been no terrorist attacks on Australian soil.

However, in Melbourne, five individuals were arrested and charged on August 4-5 with plotting to conduct a suicide attack on a military base near Sydney. The men allegedly intended to attack the base with automatic weapons and kill as many military personnel as they could until they themselves were killed. Full details of the case are yet to make their way into the courts, but the law enforcement agencies have claimed that the men had sought a fatwa, or religious ruling on the permissibility of their planned attack from Sheikhs associated with the Somali militant group Al-Shabab. Al-Shabab is currently waging a jihadist insurgency against the Transitional Federal Government in Somalia. Links between Al-Shabbab and Somali refugee populations in Australia and other Western nations are causing much concern for lawenforcement and security agencies.

Recent defence spending includes a AUD2.4bn boost in expenditure on defence equipment, on top of an increase in funding for the war in Afghanistan to give total spending in 2009/10 of AUD3bn. Afghanistan alone will cost AUD1.2bn. The government has also budgeted an extra AUD87mn to establish a Middle East operations headquarters in the United Arab Emirates and AUD62mn for operations in Iraq in 2009/10 – despite its formal military operations there ending on July 31. However, the global financial crisis has already forced the Department of Defence to shelve plans to buy billions of dollars of military equipment, including a new AUD5bn maritime surveillance system. The economic downturn will also mean the navy will not exercise the option to acquire a fourth air warfare destroyer costing AUD2bn. It could also force a one-year delay in plans to spend AUD16bn on 100 F-35 JTFs.