This article is from the Australian Property Journal archive
THE economy is set to resume strong growth once the current episode of 'overdone pessimism' ends, according to BIS Shrapnel.
BIS Shrapnel’s Long Term Forecasts, 2008 to 2023, report predicts growth will be driven in part by lower interest rates over the next year, although inflationary pressures from capacity constraints and labour markets will prevent interest rates from falling back to the low levels seen earlier this decade.
BIS Shrapnel forecast interest rates will be lowered during 2008/09, it said the Reserve Bank of Australia will not allow the sharp slowdown in retail spending and building approvals witnessed in the first half of 2008 to cause further contraction in employment, spending and investment.
Report author and economist Rachael Logie said the market is witnessing an overblown crisis of confidence and the effects of a global credit squeeze rather than a debt-constrained slowdown.
“National income growth remains strong, underpinned by the profits of the mining boom… Current economic fundamentals remain sound,” she added.
“Markets are not generally oversupplied and in the case of residential property there is considerable pent up demand which we expect to be released from 2009/10 as credit conditions start to ease.
“The external sector is also poised for a recovery underpinned by sustained high demand for commodities and a significant depreciation in the Australian dollar over 2009 and 2010, which will boost competitiveness.
“Total business investment activity is also expected to remain at high levels on account of sustained high demand for commodities and the backlog of work required to update the infrastructure network,” she continued.
According to BIS Shrapnel, the combination of rising supply and slowing demand will ease inflationary pressures, however in the absence of a sharp contraction in demand and accompanying job losses, the economy will not return to the low inflation, low interest rate environment which operated earlier this decade.
“The playing field has changed, both at home and abroad, and inflation is now intransigent.
“More recently, we have seen the emergence of supply constraints in housing, energy and child care. These supply constraints will ease once investment responds to strong price rises – and in the case of housing, after credit conditions ease,” Logie said.
BIS Shrapnel believes it is the direction of tradeables inflation, and its effect on costs, prices and wages, together with the domestic labour constraint, that will mean the RBA will struggle to keep inflation within its target bounds in the medium term.
Disinflation from cheap Chinese goods will not provide the dampening impact in the next decade to the same extent as it has in the current decade and a depreciating Australian dollar will see the relative price of imported goods rise.
Wages growth has not been the trigger of inflationary pressures in the current tightening phase as labour market reforms and institutionalised setting of wages have reduced growth. However, the ongoing tightness of the labour market means wages growth will remain within a four-to-five per cent band, which will make it harder for the RBA to keep inflation within its two-to-three per cent target band.
BIS Shrapnel forecasts slowing investment and consumer spending, and a boost to productivity from prior investment, will push the unemployment rate above five per cent by the second half of 2009.
However, as renewed residential construction activity drives momentum in the economy and GDP growth strengthens again, the unemployment rate will drop back to current levels of close to 4% by 2012.
“A low unemployment rate means that it wouldn’t take much of a pick-up in investment and employment for the economy to again exceed its speed limit and re-ignite inflationary pressures,” Logie said.
“And the result is that we are likely to see shortened, or flattened, investment cycles accompanied by rising inflation and escalating interest rates.
“We are at the top of the current interest rate tightening cycle, but it is only a localised peak. The stubbornness of inflation, due to labour constraints, means that we are unlikely to see a return to a low interest rate environment in the absence of a recession,” Logie concluded.
Australian Property Journal
