SA Centre for Economic Studies predicts continued economic expansion

Thursday, 1 December 2005

The South Australian Centre for Economic Studies today released its latest assessment of the state of the Australian and South Australian economies.

In a generally upbeat assessment, the Centre has downplayed a number of concerns about the economic outlook and forecast not only that the current record expansion of the Australian economy will continue in 2006, but that growth will strengthen.

After recording growth of only 2.3 per cent in 2004-05, the Centre forecasts the Australian economy will grow 3.3 per cent in 2005-06 and 4.0 per cent in 2006-07.

The South Australian economy is not expected to rebound as strongly as the national economy, but nevertheless is expected to record solid growth over 2005-06 and 2006-07, with unemployment forecast to fall below 5 per cent in 2006-07.

According to the Centre, the latest economic data confirms that there has been a welcome change in the composition of growth over the past 18 months, with an easing in the unsustainable pace of growth of household spending, to be replaced by strong growth in business investment. High international commodity prices, especially for resources, have seen Australia's terms of trade move to its highest level since the mid-1970s and this is also lending major support to the economic outlook.

The centre believes the Australian economy can be depicted as having moved over the past 18 months from "boom to boom". Where previously it had been booming residential property prices facilitating strong growth in household spending, now it is booming commodity prices facilitating strong growth in business investment.

According to the Centre, the primary reason for the expected lesser rebound of the South Australian economy over 2005-06 and 2006-07 is the differing structure of the South Australian economy, with the industries driving the investment boom at the national level being less represented in the South Australian economy. In particular, this includes commodity industries such as iron ore and coal, but also reflects a differing mix of industries within manufacturing and the service industries.

Nevertheless, while South Australia may not be participating to the same extent as other states in the current national investment boom, the longer-term outlook for growth in investment spending in South Australia is more positive. Major projects on the horizon include a $5 billion expansion of the Olympic Dam copper and uranium mine and, of course, the construction of new naval warships. In addition, a number of other mining projects are expected to proceed over the next few years.

The Centre believes the major concern in the economic outlook remains the threat of higher inflation. But the Centre is hopeful that productivity growth will be resumed in 2005-06 and that there will be only limited second-round price effects of high oil prices, so this threat will eventually dissipate.

The Centre expects inflation to rise slightly over the next twelve months and for the Reserve Bank to implement a further increase in interest rates in the first half of 2006.

Other findings in the report include:

· At both national and South Australian levels, household consumption spending is expected to continue to grow in a weak to modest manner over the remainder of 2005-06 and into 2006-07.

· At both the national and South Australian levels, dwelling investment is expected to show a more pronounced decline over 2005-06 as work "in the pipeline" is completed. However, this current cyclical downturn in home building activity is expected to be modest.

· Australia's export performance continues to have both positive and negative repercussions for Australia's overall growth outlook. The growth in exports in value terms has delivered several positive outcomes for Australian economic growth, but the flatness in export volumes remains a matter of major concern for the longer-term economic outlook.

· The current long expansion phase of the Australian economy has wrought major changes in the South Australian labour market. Since 1998, medium and long-term unemployment rates have fallen sharply. Short-term unemployment rates have not fallen as much, but this is to be expected given the association that exists between short-term unemployment spells and transitions between jobs (so-called "frictional unemployment"). However, underemployment, in the form of part-timers wanting to work more hours, remains stubbornly high, and it appears that at least part of the transition out of unemployment has been into underemployment.

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