Treasurer Wayne Swan has warned of "very substantial headwinds" facing the global economy but said people should be confident about the strength in Australia's economic fundamentals.
Local share investors appear to have shown just that today, with the Australian market ending 1.3 per cent higher, despite weakness on Wall Street after high-level eurozone talks failed to live up to expectations.
Investors will be carefully watching the opening of European bourses after talks between French President Nicolas Sarkozy and German Chancellor Angela Merkel dashed hopes for immediate steps to resolve the area's debt crisis.
At the same time, the eurozone posted meagre 0.2 per cent economic growth for the June quarter, heightening fears of a slide back towards recession.
But visiting Nobel Laureate Economist Professor Michael Spence told the National Press Club in Canberra he was confident that European politicians will strike a resolution, even though it is clear that Germany doesn't want to have to pay for other countries' problems.
"It eventually has to reach a conclusion to stabilise the current situation," Prof Spence said, adding that only then can they sit down and decide the future of the eurozone.
Prof Spence also thought the US rating downgrading by Standard & Poor's was premature and unjustified on the US's current fiscal position.
"But if we stay on the current course, then the S&P downgrade will be fully justified in the next six to 12 months," he said.
Fitch Ratings confirmed US AAA debt rating on Tuesday and issued a "stable" outlook that means it has no intention of changing it just yet.
But it said it would revisit the rating after the congressional committee that is supposed to figure out how to cut government spending presents its findings, due by the end of November.
"We are still going to face very substantial economic headwinds in the global economy as we go forward," Treasurer Wayne Swan told parliament.
"In Australia, we do have every reason to be confident about our fundamental economic strength."
Still, new data on Wednesday was far from inspiring, with a leading index of economic growth pointing to the slowest pace since August 2009.
The annualised rate of the Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity in three to nine months time, was just 1.6 per cent in June and well below its long term trend of three per cent.
The latest Australian Chamber of Commerce and Industry's (ACCI) small business survey showed trading conditions in the June quarter fell to their lowest level since March 2009.
The chamber's chief executive Peter Anderson said small business conditions continued in a declining trend due to an appreciation in the Australian dollar, the prospect of rising interest rates and taxes, and weakness in consumer confidence and spending.
"Escalating fears on European debt crisis and the possibility of economic slowdown in the US over the recent weeks will exacerbate the already lacklustre small business confidence," he said releasing the survey.
Other data showed that the softening trend in jobs growth since the start of the year was containing wage pressures, and was another factor that will keep the lid on interest rates.
The Australian Bureau of Statistics wage price index rose 0.9 per cent in the June quarter, which trimmed the annual rate to 3.8 per cent from 3.9 per cent.
