KEY POINTS:
Early next month the board of the Reserve Bank will give Australia an idea of what lies ahead for the nation, as the new and untested Labor Government bunkers down to deal with storm fronts gathering over the economy.
The board is expected to announce a further rise in interest rates, following its decision to postpone an increase at its December meeting because of the continuing sub-prime crisis in the United States and the resulting turmoil in financial markets.
The intention will be to apply the brakes further to the economy in a bid to bring inflation properly to heel.
Economists believe the Reserve Bank will be hard-pressed to decide between global concerns and soaring inflation at home bursting beyond the bank's target range of 2-3 per cent, to an underlying rate of 3.6 per cent in the December quarter. But most predict the bank will lift the present 6.75 per cent cash rate.
There is also some concern that the resources sector, which has been powering the economy, could take a significant hit if the US topples into recession, reducing demand for imports from Australia's main resources customers such as China.
On the domestic front, there are fears higher interest rates will increase pressure from debt, reduce consumer spending, flatten the key housing sector, and nudge unemployment up from its present low of 4.3 per cent.
Less than a month into the New Year, Australians are less confident their economy will ride out the storms.
A Morgan poll last month showed that two-thirds believed unemployment would remain low or fall further, 80 per cent considered their jobs to be safe, and three-quarters were confident that if they were laid off they would have little trouble finding a new job.
But a new Melbourne Institute consumer survey reported confidence had fallen by more than 8 per cent, with the survey index plummeting to its lowest level since November 1996.
Last month's survey of industrial trends by Westpac and the Australian Chamber of Industry and Commerce predicted tighter labour markets and strong economic growth, adding to other forecasts placing economic expansion at about 4 per cent.
The Reserve Bank's most recent forecast predicts growth of 3.75 per cent in 2007-08, and 3.5 per cent in 2008-09, is below the Treasury's expectations of growth of 4.25 per cent and 3.5 per cent for the same periods.
This is too fast for the Reserve, and for Treasurer Wayne Swan.
With petrol prices soaring, wages rising, food prices high because of the drought, higher building and housing costs and increasing rents, inflation is rising at its fastest rate in 16 years.
Treasury forecasts predict these pressures will continue for the next 18 months, firming expectations of a rates hike.
Ahead of any movement in the Reserve Bank's official rate, the banks have already increased their variable home mortgage rates, citing serious exposure to the US sub-prime market.
While describing the increases as a stark reminder that Australia was not immune from the global tremors triggered by US problems, Swan said that if inflation could be shackled, the nation was among the best placed in the world to ride out the storm.
He said this week that while China and other Asian markets would suffer from the US crisis, continued regional growth would insulate Australia and its vital resources sector to some degree.
But with big stockmarket losses, other surveys showing continued rises in inflation and expectations of wage rises, corporate Australia is bracing for tougher times.
The most recent SAI Global-Australian Chamber of Commerce survey of investor confidence said that business optimism was starting to wane because of both international conditions and local problems.
Trends in expectations for national economic conditions, investment climate and business investment have all fallen, the index charting expectations for price movements is at a seven-year high, and expectations for higher wages and interest rates are at their highest level in a decade.
Swan is working on a tight May Budget designed to ease pressure on interest rates, including sharp controls on government spending and a severe pruning of hundreds of millions of dollars across a broad spectrum of programmes promised last year by the ousted Coalition Government.
On a broader front, Swan will be working to dampen household consumption and to lower the pace of imports and the resulting weight on the nation's current account deficit - and the cost of financing it.
The flip side is that as consumption slows, economists warn that growth in sectors such as retail will also suffer and, combined with rising wages, could push unemployment up again.
So far, retailing appears to be holding its ground, with November figures released this week showing growth of 0.8 per cent for the month, and expectations for strong December pre-Christmas sales.
The real test will come as the economy moves further into 2008 and absorbs higher interest rates and other costs.
The housing industry is also holding its breath, despite an 8.9 per cent increase in approvals in November. But the Housing Industry Association warned that the apparent turnaround was largely provided by a New South Wales-driven boom in the volatile multi-unit segment, with approvals for detached housing just treading water.
And while prices for key Australian agricultural commodities such as grains and wool are rising, farmers are still trying to recover from years of drought, while higher supermarket prices for their produce are adding to inflation.
Beyond Australia's shores, there is plenty to worry about.
Many economists fear that recession is looming in the US and that demand for imports will fall.
This in turn could reduce demand for products from China and other Asian suppliers, prompting them to reduce orders for Australian commodities and lowering world resources prices and thus income for Australia.
The Australian economy has proved to be a resilient creature, thriving through the Asian meltdown and subsequent international crises to produce more than a decade of uninterrupted growth and prosperity.
The question is: can it do it again?