Recent data support our forecast of 3.0 per cent GDP growth in 2011/12, building to around 3.5 per cent in 2012/13. The main drivers of growth in 2012/13 will be ongoing strong growth in mining-related engineering construction – even allowing for a very large imported component; a large increase in Energy, Minerals and Metals exports; increased trading-partner growth; solid and rising population growth; and slightly lower interest rates on average than prevailed over the past year.

Providing some offset, the Federal Government’s plan to eliminate its $44 billion budget deficit, combined with restraint at the State level, will subtract around 1 per cent from GDP in the coming year. The high Australian dollar is expected to continue to hurt trade-exposed industries, and negative news out of Europe will keep weighing on consumer and business confidence. However, we do not expect the negative impact of these latter two factors to be worse than has been the case for the past year, and hence do not expect them to knock GDP much further.

Mining and mining-related industries and regions will continue to be the big beneficiaries of the growth. Conversely, other trade-exposed industries will remain under considerable pressure. In between, the outlook for domestically-focused industries is gradually improving. The stimulatory impact of the interest rate reductions over the past six months – with a bit more to come – will gradually make their impact felt over the coming months, providing support to household spending, dwelling building, and business confidence.

The Reserve Bank has been able to lower the cash rate because inflation has fallen sharply. While soft domestic demand has helped ease wage and price inflation pressures, the main reason for lower inflation has been the appreciating Australian dollar and the fall in fruit and vegetable prices from their flood-induced peaks of last year. These factors have largely run their course, meaning that underlying inflation will now stabilise, and gradually build through next year. Unfortunately, there was nothing in the Federal Budget that will support the economy’s ability to grow strongly without creating inflation.

Topics in May

• Benign inflation prompts much needed sizeable cash rate reduction. How much more to come?
• The federal budget: not as negative for 2012/13 growth as we had feared, but no support for the medium term
• What will fill the gap left by fiscal policy and drive growth in 2012/13?
• What’s happening with the New Zealand economy?

Topics in Forthcoming Bulletins

• March quarter national accounts, including activity, investment and profits
  
• Drivers and outlook for long-term bond yields
  
• Indepth outlook for the global economy

Joy Xenita

PH: +61 2 8458 4220