Update report – january 2012

We expect the Australian economy to continue to perform well over the next decade. This is based on a view that the European and US economies will ‘muddle through’, and that robust growth in China will continue to feed through to non-Japan Asia.

The minerals boom is expected to continue to shape the Australian economy over the next five or so years.

• Annual business investment is forecast to increase by around 45 per cent between June 2011 and June 2014
• Annual commodity export volumes are forecast to increase 25 per cent between June 2011 and June 2013
• The Australian dollar is forecast to remain at or above parity against the US dollar for the next couple of years, before trending down from late 2014 – in line with the terms of trade.
• Resources, particularly labour, will continue to move towards the mining and construction industries, and away from other trade-exposed industries.
• These factors, combined with a household sector that is once again opening their wallets, mean that we expect economic growth in Australia to accelerate over the next 2½ years.

Over late 2012 and into 2013, the activity in the mining-related industries, increased household spending, and a pick up in residential investment, is expected to feed through to increased demand elsewhere in the economy. However, non-mining trade-exposed industries will remain under pressure from the high Australian dollar and weak growth in key markets.

The broadening of economic growth beyond the mining and mining-related industries will drive employment growth and current excess capacity will abate. This in turn will spur an increase in non-mining business investment after an extended period of under investment. It will also require the Reserve Bank to start raising interest rates from late this year (following an expected 25 basis point cut in February 2012), and progressively through to mid 2014. Fiscal policy is also expected to provide a drag on the economy as the Government endeavours to return to surplus next year.

The risks to this outlook are balanced to the downside, and relate mainly to developments in Europe. At this stage we believe that authorities in China and Australia have sufficient armoury in their respective tool kits to provide additional stimulus to keep their economies going if the situation requires. Nevertheless, the minerals boom will not last for ever. It is therefore important that policy makers and firms ensure they are well placed to continue to grow when it comes to an end.

The Long Term Forecasts report examines the outlook for the Australia’s economic growth, employment, investment levels and their sustainability, and for key industry sectors - with annual forecasts for the next five years and two five year average forecasts thereafter. Our independent assessment and respected forecasts of the timing, nature and strength of the next cycle, shifts in financial conditions and risks surrounding the outlook are essential inputs for annual budgeting, strategy formulation and mid to long term business planning.

Joy Xenita

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