Friday, May 28, 2010

How bright is outlook? Amongst advanced economies, the best there is

Australia has received perhaps the ultimate economic accolade.

The International Monetary Fund says "among major advanced countries, Australia's growth potential over the medium term clearly stands out as the best".

The acclaim comes with a startling forecast. Australian exports to China, at present accounting for 1 in every 5 ships leaving the country will by the middle of this decade account for 1 in 3.

Just a decade ago China accounted for 1 in 20 bulk carriers leaving the country.

The IMF working paper came on the same day as the Bureau of Statistics reported extraordinary expected growth in mining investment with the sector expected to account for about half of all planned business investment in 2010-11.

China overtook Japan as Australia's biggest customer a year ago. The IMF report says by 2015 Australia will sell it twice as much as Japan.

The growing importance of China and also India which a decade ago took 2 per cent of our exports and will soon take 11 per cent will expose Australia to customers with an average economic growth rate of 6 per cent, the fastest on record.

The Fund says Australia's high immigration rate, boosted by our "relatively strong economic performance" will continue while New Zealand's falters, "with a stronger recovery in the Australian labour market likely attracting workers across the Tasman".

The IMF believes the prices Australia receives for exports will "remain elevated," an assessment at odds with Australia's Treasury which expects a retreat in Australia's terms of trade next year.

The Fund sides with Treasury Secretary Ken Henry who yesterday told parliament that a shortage of good workers rather than investment would be the biggest constraint on Australia's growth.

It believes that Australia's unemployment rate has a natural floor of 5 per cent below which inflation will accelerate. At 5.4 per cent Australia's labour market is close to that floor.

The analysis is consistent with that of the Paris-based OECD which Thursday forecast four to five more interest rate hikes for Australia in order to restrain inflation and house prices.

The investment intention survey was conducted throughout April and the first week of May meaning that most of the data was collected before the the government unveiled its proposed Resource Super Profits Tax.

If mining companies have decided to put projects on hold that decision would not be reflected in the ABS figures.

They show that the mining was the only major industry to cut its capital spending in each quarter last year, lifting it by 2.6 per cent in the first quarter of this year. It accounts for 45 per cent of all planned private investment in the coming financial year despite making up 8 per cent of the economy.

Investment by manufacturers slumped 15 per cent in the March quarter as government stimulus measures came to an end. For the first time in businesses wound back short-term investment plans.

"It is clear Australia will be riding on the back of the mining sector in the coming year," said CommSec economist Craig James. "Miners will spend twice what manufacturers will."

Seperately Moody’s Investor Service reported that despite fears that last year’s bumper crop of first home buyers would hit the wall as interest rates rose, the delinquency rate of 2009 mortgages was the lowest on record.

Just 1.34 per cent of prime mortgages were a month behind on payments compared to 15 per cent in the United States with 10 per cent seriously behind.

Published in today's SMH

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