Current News – Market Commentary

The Australian economy is predicted to pick up strongly over the next two years, leading to another property fuelled boom by 2012 according to the latest report released by economic forecaster BIS Shrapnel. The Long Term Forecast report for February 2010 states Australia is now in a recovery phase after a relatively modest downturn.

From next year, the Federal and State governments are expected to rein in their deficits through reduced public investment. The construction industry is then likely to take over from public spending as the key driver of growth initially.

The report's author and BIS economist, Richard Robinson, said "Initially spurred on by a combination of first home owner/builder grants and low interest rates, this upswing will gather momentum into a boom by 2012. Despite lingering affordability problems, healthy consumer confidence, high rents, a chronic undersupply and rising immigration will continue to boost first home owner, investor and upgrader demand”.

Mr Robinson also warned that while the economy has enough capacity and slack in the labour markets to handle this initial surge, problems are likely to occur in the next three to four years as inflationary pressures re-emerge and interest rates creep up.

“We will then see the Reserve Bank hike rates from neutral to contractionary, meaning a cash rate over six per cent and the housing variable toward nine per cent before the next episode is over," he said.

In the short term despite growing consumer confidence, consumer spending will be restrained by weaker growth in wages, higher interest rates, less availability of full-time work, poor profits and dividends, and a lack of tax cuts. As the economy recovers further however, higher levels of employment and wages growth should see spending return.