Australian PM Gillard says track to surplus more challenging given market turmoil, following Aussie market crash, calls for rate cut

Australian Prime Minister Julia Gillard says the latest turmoil on global financial markets will make the government's surplus track more challenging than thought earlier in the year, although the government is committed to its 2012/13 surplus promise.

However, Prime Minister John Key stuck to his view that strong growth in New Zealand was still achieveable despite signs of a dip back into recession in America and parts of Europe.

Australia is New Zealand's biggest trading partner, with policy makers here pointing to New Zealand's connections across the Tasman, and with growing Asian countries like China, as the driving force behind sustaining domestic growth out of the recessionary environment the New Zealand economy has been in since 2008.

Gillard was reacting as sharemarkets continued their plunge on Tuesday, with the S&P/ASX 200 down over 4.5% in early afternoon trade. The Australian dollar dropped below parity with its US counterpart today, after reaching over US$1.10 in the last few weeks.

Australian banks have slashed fixed-term mortgage rates today as markets see little prospect of a Reserve Bank of Australia rate hike in coming months, with talk firming that the Australian central bank will cut its benchmark rate in response to rising fears of another global recession due to economic weaknesses in Europe and the US.

Worse than expected effects of the Queensland floods on the Australian export sector have also led to calls for an interest rate cut by the RBA, and three-year-high inflation in China may force authorities there to raise interest rates, slowing domestic growth and therefore demand for Australian and New Zealand commodities.

"We have got strong government finances, we have been able to deliver fiscal consolidation which will bring the Budget to surplus in 2012/13," news.com.au reports Gillard saying.

"Events impacting on global growth make the challenge more difficult but we are working to return the Budget to surplus in 2012/13 as promised," Gillard said.

Here Key reiterates support for Treasury's 'reasonably conservative' growth forecasts

Gillard's comments came as New Zealand Prime Minister John Key said the economy here had a strong foundation to withstand shocks thrown at it by the current turmoil. Key has so far stood behind New Zealand Treasury predictions that the government would reach a budget surplus in 2014/15, as domestic factors like the Rugby World Cup and rebuilding in Christchurch would spur growth in the short-term.

"I sincerely believe that the growth forecasts put together were reasonably conservative. At the outer edge you may see slightly lower global growth  - we always reflect on the situations as we find ourselves," Key told media this morning in Parliament.

"But for the most part I think we can take confidence from the fact that our foundation stones are much stronger than they were three years ago. We're not in a position where we have to go to the financial markets to fund the country - we've got plenty of cash, and we've actually got it at a low interest rate - our companies are in much better shape, there's still a lot more room our exchange rate could move now if we had to, the Reserve Bank has tools in the tool box," Key said.

"So I think from New Zealand's point of view, we can take a degree of confidence. As I say, we're not immune, but I think we're in better shape than the United States and Europe finds itself," he said.

Lower global growth could hurt an export-led recovery to some extent, although a drop in commodity prices would be coupled with a fall in the exchange rate.

"This has been a significant move by Standard & Poor's and the world is now taking stock of what that might mean. I think what it shows you [is] over the course of the next two or three months, there will be volatility, both in the domestic market here in New Zealand and internationally," Key said.

"But overall, all the government can do is make sure that your country is in the best shape that it can be, and I think, given the circumstances we inherited, and what we face, we are in tremendously good shape," he said.