OECD June Forecast for Australia

http://www.oecd.org/eco/outlook/economic-forecast-summary-australia-oecd-economic-outlook-june-2017.pdf

  • Economic growth projected to increase gradually and reach almost 3% by 2018
  • Drag on growth from declining resource-sector investment will fade and gathering momentum outside the resource sector will support wage and employment growth, thus boosting consumer spending
  • Tightening labour and product markets will bring inflation up from current low levels
  • Predict the RBA will increase interest rate towards the end of 2017, as growth improves and CPI moves towards it 2-3% target band
  • Higher interest rates will relieve pressure on the housing market, although the risks posed by possible overheating still call for enhanced macro-prudential policies
  • In the event of an economic downturn, fiscal policy should be used to support activity – given stable position, projects with high rates of return should be pursued in this endeavour

Economic activity:

  • In the resource sector:
    • cutbacks in investment are ending, while the rebound in iron-ore and coal prices has boosted business income and tax revenue.
    • New liquefied-natural-gas (LNG) production is coming on stream
  • Individuals
    • Employment, household incomes, consumption, and prices continue to grow relatively slowly.
  • Trade
    • Poor weather has disrupted commodity exports and the commodity-price rebound appears to have ended
  • Housing
    • House prices in some markets, already very high, are still rising despite macro-prudential tightening.

Monetary and fiscal policy:

  • Monetary policy remains highly supportive
  • Policy tightening projected to begin towards end of 2017 with output recovery
  • Tighter policy stance will ease pressures on house prices, and will forestall the build-up of other financial distortions that accompany a sustained low-interest rate environment
  • High house price and debt still pose macroeconomic and financial risks, calling for continued use of macro-prudential tools
  • Public debt in relation to GDP remains relatively low and is projected to start falling given the government’s proposed budget aims for annual fiscal consolidation of around 0.5 percentage points of GDP in 2017 and 2018
  • Strong fiscal position provides room for a more gradual fiscal consolidation or even an expansion should economic activity weaken unexpectedly
  • Improvements to framework conditions for businesses plus measures to combat social exclusion are needed to facilitate continued benefit from trade and globalisation
    • ‘National Innovation and Science Agenda’
    • Reductions in corporate tax rates
    • pension-tax reforms that will provide greater support for low-income household
    • Scope for further tax reforms that make greater use of efficeint tax bases, such as the GST and land tax
    • Visa programmes for migrant workers and citizenship conditions are currently being tightened-  care should be taken this does not compromise access to the global talent pool.

Gradual recovery in output growth forecast:

  • Recovery in mining investment, new LNG production, and continued rebalancing towards non-mining sectors will drive the gradual pick-up of overall activity
  • Supported by monetary policy easing
  • Employment growth should pick up, supporting cnsumption
  • Rising output will increase inflation
  • Developments in commodity markets, especially those linked to the Chinese economy, remain an important source of income and growth, but also of uncertaintiy and risk.

The single largest domestic risk remains the possibility of a large fall in house prices, which could reduce household wealth and consumption, and damage the construction sector, leading to significant job losses.

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