Wednesday, November 29, 2006

A prosperous & strengthening Australian economy

The just released OECD Economic Outlook provides a positive assessment of the Australian economy. Interest rates should ease mid-2007 when inflation will fall. With recovery from the drought and given the effects of interest rate increases in stabilising demand growth in GDP, while slumping in 2007, will increase to 3.4% in 2008. Exports will grow faster than imports leading to a narrowing current account.

The Treasurer Peter Costello, yesterday, released the following statement:

‘The OECD’s latest Economic Outlook presents a positive outlook for the Australian economy, with economic growth over the next two years expected to accelerate.

The OECD forecasts Australia’s real GDP to grow by 2.6% in 2006, before picking up to 3.0% in 2007 and 3.4% in 2008. The OECD notes that GDP growth in 2007 will be ‘held back’ by the effect of the drought. The forecasts incorporate some rebalancing of growth with increasing export volumes offsetting an expected easing in domestic demand. In line with strengthening exports and strong foreign demand, the OECD expects the current account deficit to narrow.

The OECD expects Australia’s strong labour market performance to continue, with the unemployment rate forecast to remain well below the OECD average. Reflecting the impact of high energy prices and fruit prices, the OECD predicts that inflation will peak in 2006, before easing in 2007 to average around 2.8%, within the Reserve Bank’s inflation band.

In the OECD’s recent Economic Survey of the Australian Economy the OECD noted that Australia’s ‘recent macroeconomic performance continues to be impressive’ and that ‘living standards have steadily improved since the beginning of the 1990s and now surpass all G7 countries except the United States’.

In terms of economic activity across the OECD area more broadly, the Economic Outlook notes that while there will be some rebalancing, growth is expected to remain robust in the near-term, aided by falling oil prices, buoyant emerging economies and supportive financial conditions. After growing by 2.7% in 2005, growth across the OECD area is projected to increase to 3.2% in 2006 before easing to 2.5% in 2007. The positive outlook is expected to be supported by growth in the euro area, which is showing signs of an increasingly stable recovery, and growth in Japan where the economy’s expansion is set to continue in 2007, albeit at a slightly slower pace. Although growth in the US has slowed due to a weakening housing market, the OECD expects this will be temporary and predicts healthy growth will soon resume’.

Its an amazingly positive view that, if confirmed, almost guarantees John Howard's re-election at the next Federal poll.

10 comments:

Steve Edney said...

"With recovery from the drought and the effects of interest rate increases in stabilising demand growth in GDP while slumping a bit in 2007 will increase to 3.4% in 2008."

I'm interested in what method the OECD uses to forecast out weather two years in advance??

hc said...

I assume they suppose regression towards more normal conditions - that seems a good bet. I think long-term forecasts are available -but as I noted a few posts ago - these are quite unfavourable at least uuntil the end of summer 2007. I agree if the drought continues to end 2007 their forecasts would be out.

I was interested in an AFR comment on the farm sector yesterday. Most farmers do see the drought as part of the climate cycle and not as evidence of global warming. Farmers then will also presumably support the OECD forecasting methodology.

Robert Merkel said...

Maybe I'm misinterpreting the figures, but basically what you're saying is that real GDP growth in 2007 will be not much above zero.

Keating lost the 1996 election with a about a 1.2% real growth rate in the 12 months leading up to it.

You're not making a particularly persuasive case here.

hc said...

Robert, the GDP growth rates are real so these figures are growth rates excluding inflation effects. The terminology of OECD is confusing.

Bring Back the Currenct Lad's blog said...

Given what SuperMac has said the OECD has relied too much on poor treasury forecasting and not enough on superior RBA techniques in believing interest rates may fall next year.

If we have had 15 years of growth then the present Government didn't start this golden era merely perpetuated it.

derrida derider said...

Homer, I don't think even harry would argue that the good times started before 1996, and that a lot of the groundwork was laid before then. Still, it's a remarkable economic record - a combination of good luck and good management (mostly by the RBA). The 'good management' consists mainly of just not stuffing things up, but as a small open, narrowly based (and therefore volatile) economy, not stuffing up Australian macroeconomics is a real achievement.

The main threats to the long boom are twofold - overseas conditions which the govt has no control over, or the cumulated effects of poor human capital policies - this government's worst failing, IMO.

Bring Back the Currency Lad's blog said...

DD I am not deriding their achievement of continuing the golden age but agree it has been the RBA that has assisted.
In letting the $A fall in the Asian crisis we missed the recession NZ experienced.

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Anonymous said...

It seems to me that many continue to fail to recognize that, since the current government's preferred way of disbursing budget surpluses
in tax cuts and deposits into the future fund has been followed,the country has suffered an alarming lack of attention to investment in
social overhead capital ( an old term).In fact the last major reference in our national budget was probably Gough's in 1975 ---Keating did make a passing comment or two but there are not any short term votes in it BUT the incoming government(s) will have to face up to it because the coward's path of public/private cooperation is going to prove costly and biased in favour of private profits at the expense of social benefits.While the market system must remain our fundamental driver,governments must remain willing (and able) to ensure that social goals are not clouded or subverted by private greed.If some had their way the nation would be criss-crossed by a system of tolls and user-pays with little benefit to the citizens.For instance,some of the traffic "solutions" currently under construction will no doubt be privately profitable as their construction design eventually guarantees their use but may probably make the long-term traffic problems worse.

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