The election has left government in limbo for a time, but the economy waits for no-one and appears to be running out of growth drivers.

Dwelling approvals have levelled off in recent months, although the strong growth over the second half of 2009 will continue to drive a near-term rise in dwelling activity. Together with rising incomes and strong demand for housing, this should provide sufficient impetus to growth to offset a moderation in fiscal stimulus activity and a cyclical bottoming in business investment over 2010/11. However, overall construction activity will be weak.

We now expect the RBA to keep its power dry for the remainder of 2010. Consumers remain in precautionary saving mode and continue to shun debt. Rising living costs have also stretched household budgets. Confidence rebounded in July and August, consumers are likely to remain cautious about supplementing comparatively soft household income growth with debt funding while economic conditions remain uncertain.

However, consumers on the whole are now in a better position financially than pre-crisis having seen incomes bolstered by a combination of tax cuts, stimulus payments and, previously, falling interest rates. Also, employment is at a high level and there is little spare capacity in labour markets. The current weakness in business investment is temporary, with activity set to regain momentum from 2011/12 led by the mining sector. The RBA is forward looking when it comes to setting interest rates and will remain watchful.

Topics in August

• Manufacturing snapshot
• June quarter inflation
• State of Play

Topics in September

• June quarter national accounts
• Investment update
• State outlook

Kirrily McNamara

PH: +61 2 9959 5924