TMCnet News
Australia: Country outlook(EIU Viewswire Via Thomson Dialog NewsEdge)COUNTRY VIEW FROM THE ECONOMIST INTELLIGENCE UNIT OVERVIEW: The ruling centre-right Liberal-National coalition, led by the prime minister, John Howard, is the first government to enjoy a majority in both houses of parliament in 20 years, and will continue to use its parliamentary strength to push ahead with economic reforms previously blocked by a lack of support in the Senate (the upper house). However, attempts by the National Party to extract benefits for its rural constituents in return for supporting what is essentially a Liberal agenda are likely to fuel tensions between the two parties. The government will keep the budget in surplus, and pressure for more tax cuts is likely to mount. An improved export performance will underpin annual average real GDP growth of 3.3% in 2006-07. The Economist Intelligence Unit expects annual inflation to average 3% in 2006, the top of the target range of 2-3% set by the Reserve Bank of Australia (RBA, the central bank), before easing to 2.6% in 2007. The large current-account deficit will narrow to around 5.1% of GDP by 2007. Domestic politics: The Liberal-National coalition led by Mr Howard is the first government to enjoy a majority in both houses of parliament in 20 years, and will continue to use its parliamentary strength to push ahead with economic reforms previously blocked by a lack of support in the Senate. The main opposition Labor Party, the minor parties and independents are not in a position to block or amend contentious legislation, but the government will continue to face some dissent from within its own ranks, as the National Party attempts to extract benefits for its rural constituents in return for supporting what is essentially a Liberal agenda. Tensions between the coalition parties are therefore likely to increase. International relations: Free-trade agreements (FTAs) with both the US and Thailand came into effect on January 1st 2005. Talks on an FTA with China are under way, although quarantine and investment regulations and Chinese government subsidies to industry are potential hurdles. The federal government is also pursuing FTAs with Malaysia, the UAE and Japan. Approval has been given by the ten-member Association of South-East Asian Nations (ASEAN) for Australia and New Zealand to be included in a future free-trade deal with ASEAN. Negotiations are expected to take at least two years, and a long phase-in period is likely. However, Australias future role in the proposed East Asia community remains unclear, given that in December the Malaysian prime minister, Abdullah Badawi, the chair of the inaugural East Asian Summit held in that month, said that Australia should not expect to become part of the group. Policy trends: Further tax relief for individuals announced in the federal budget for fiscal year 2005/06 (July-June) will take effect from July 2006. Indications that stronger than expected growth in tax revenue will yield another bumper federal budget surplus in the current fiscal year will cause pressure for additional cuts in personal incomes tax to intensify. The governments labour market and welfare reforms will take effect in 2006, following the successful passage through parliament of both pieces of legislation in late 2005. If the government decides to proceed with the privatisation of the countrys largest health insurer, Medibank Private, the sale is likely to take place in early 2007. International assumptions: After an impressive performance in 2004 the global economy is slowing, although the deceleration has been modest and is expected to remain gentle in 2006 and into 2007. At an estimated 4.4% (measured using purchasing power parity conversion rates), world GDP growth in 2005 has been considerably weaker than the 5% notched up in 2004, although it is still comparable with some of the best years of the 1990s. The slowdown in 2005 is likely to continue into 2006 and 2007. World GDP growth is forecast to ease slightly to an annual average of 4% in 2006-07, and world trade growth is expected to average an annual 7% in 2006-07. GDP growth in the US is now forecast to slow from 3.6% in 2005 to an annual average of 2.8% in 2006-07 as interest rates rise further. GDP growth in Japan, Australias largest export market, is also expected to slow, from 2.4% in 2005 to 1.3% in 2006 and 1.1% in 2007. At an annual average GDP growth rate of 5.7%, Asia and Australia (excluding Japan) will enjoy the fastest expansion of any region in 2006-07. Economic growth: Domestic demand growth decelerated sharply in 2005, partly reflecting the adjustment in the housing market. We expect domestic demand growth to slow further in 2006, but a strong expansion in exports, as capacity constraints in the resource sector ease, will underpin real GDP growth of around 3.1% for the year. Real GDP growth is forecast at 3.5% in 2007, underpinned by another year of robust export growth and a modest pick-up in domestic demand, although there is unlikely to be a return to the unsustainably high rates of domestic demand growth seen in 2002-04. Inflation: The jump in petrol prices during the third quarter of 2005 pushed up the year-on-year rate of consumer price inflation to 3%, the top of the 2-3% target range set by the RBA, and inflation is consequently estimated at an average of 2.8% in 2005 as a whole. Despite a further easing in domestic demand, the tight labour market and strong price pressures upstream mean that inflation is expected to average around 3% in 2006. Lower fuel prices should help to offset the impact on prices of a modestly weaker currency in 2007, when inflation is forecast to average 2.6%. Although knock-on effects from higher oil prices to the broader economy have so far been limited, a resurgence in world oil prices would almost certainly feed into the broader economy, thereby increasing pressure on the central bank to raise interest rates. A sharp downward correction in the value of the Australian dollar could also cause inflation to rise more strongly than expected in the medium term. Exchange rates: Although it has slipped from its seven-year high against the US dollar in early 2005, as rising interest rates in the US have given support to the US currency, the Australian dollar is still expected to average around A$1.31:US$1 (A$1.20:Y100) in 2005, reflecting the positive interest-rate differential with the US and high international prices for Australias mineral commodities. The currency is forecast to weaken gradually in 2006-07 as the interest-rate differential with the US continues to narrow and commodity prices begin to ease, averaging A$1.38:US$1 (A$1.21:Y100) in 2006 and A$1.41:US$1 (A$1.35:Y100) in 2007. A number of factors--notably light trading volumes in the Australian dollar, its links to commodity prices, vulnerability to shifts in global sentiment, and the large current-account deficit--mean that the currency will be susceptible to sharp short-term movements. External sector: The trade deficit narrowed to an estimated US$17.3bn in 2005, thanks in part to high commodity prices, the continued improvement in the terms of trade (to a 30-year high in the third quarter of 2005) and more moderate import growth. The deficit will narrow further in 2006-07 owing to strong regional demand growth (especially from China) for Australian mineral and energy commodities, a gradual easing in both the currency and capacity constraints in the mineral sector, which will support export growth, and a more moderate pace of import growth. The services balance will move into surplus in 2006, owing to the fact that the Commonwealth Games will be held in Melbourne in that year. The promotional benefits flowing from the games should support another services surplus, albeit a smaller one, in 2007. The income deficit will remain the most significant imbalance in the forecast period, reflecting both the rising cost of servicing high debt levels and the low rate of domestic savings. Nevertheless, the narrowing of the trade deficit will more than offset the expansion of the income deficit, causing the current-account deficit to contract from an estimated 5.9% of GDP in 2005 to a still sizeable 5.4% in 2006. A further narrowing of the current-account deficit, to 5.1% of GDP, is forecast for 2007. |