Economic Forecast
28 April 2008
While the latest inflation figure of a high 4.2 per cent has attracted a lot of attention, Econtech's latest
forecasts suggest that concern will soon switch to an economic slowdown that is now developing. In 2008 economic
growth will be weak due to high interest rates and tight credit availability, sending unemployment up.
On the positive side, a recession is unlikely, and in 2009 economic growth should begin to recover. The
key, near-term economic challenges for the Rudd Government will be to cut spending in the May budget to
allow the Reserve Bank more room to cut interest rates, and to fulfil its election commitment to
soften industrial relations laws without discouraging economic growth.
2008
In 2008, economic growth is forecast by Econtech to be a weak 1.9 per cent. High interest rates and
tight credit availability will see a virtual halt to growth in business and housing investment.
These tough financial conditions have come about due to both the Reserve Bank's increases in official
interest rates and the subprime crisis. The financial squeeze is also dragging down growth in consumer spending.
2009
In 2009, Econtech expects economic growth to return to a more healthy 2.8 percent. Improvements in
Australia’s trade performance are forecast to partly offset the weakness in domestic spending. Mining
exports will accelerate as the Mining investment boom is finally translated into solid growth in Mining exports,
whilst Agriculture exports will leap on ABARE's expectation of more favourable weather conditions.
Rudd Government Challenges
With the Rudd Government promising a fresh look at spending programs in the May Federal Budget,
there is an opportunity for spending cutbacks to provide the RBA with more room to cut interest rates. These
adjustments would deliver a better balance between monetary and fiscal policy.
In implementing its election commitment to soften industrial relations laws, the Rudd Government will have the
challenging task of not discouraging growth in employment and productivity in the process. Successfully
meeting this challenge will require careful crafting of the unfair dismissal laws that will apply to small
business, and will also require providing for sufficient flexibility in workplace relations
while allowing no new AWAs.
Comparison of Forecasts
Compared with Econtech, other forecasters generally expect a milder slowdown or no slowdown at all. For example, as
shown in table, the latest IMF world forecasts released in April 2008 show no economic slowdown for Australia.
Economic growth is forecast to be maintained at around a normal rate of 3 per cent in both 2008 and 2009. This
leads the IMF to expect inflation and unemployment to be steady at around 3.5 per cent and 4.3 per cent
respectively.
In contrast, Econtech expects the current tough financial conditions to lead to weak economic growth in 2008. This
pushes unemployment up and inflation down in our forecast. In our opinion, high household indebtedness by
international standards makes Australia more exposed to high interest rates and tight credit availability than
might generally be appreciated. Financial pressures are also evident in some industry sectors,
particularly property.
|
|
2008 |
2009 |
|
IMF |
|
|
|
GDP |
3.2 |
3.1 |
|
CPI |
3.5 |
3.3 |
|
unemployment |
4.3 |
4.3 |
|
Econtech |
|
|
|
GDP |
1.9 |
2.8 |
|
CPI |
3.5 |
2.5 |
|
unemployment |
4.3 |
5.1 |
Download an extract from our forecast report.
For more information, email Dinar Prihardini or
phone her on (02) 6295 0527.
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