Australia | Jun 25 2008
By Chris Shaw
Having lifted interest rates a couple of times already this year it is clear the objective of the Reserve Bank of Australia (RBA) is to slow the rate of Australia’s economic growth, Westpac Bank suggesting the target is to bring domestic spending growth down to 2% this year and next from 6% in 2007 as a means of bringing down inflationary pressures in the broader economy.
According to the bank’s global head of economics, Bill Evans, the issue will be how to bring about the slowdown across the entire economy, as the resource states of Queensland, Western Australia and the Northern Territory are receiving enough of an external boost from their buoyant mining economies to make these regions more resilient to the efforts of the RBA.
Overall Evans expects the RBA’s approach will be successful as the constrained supply of labour will mean the “mining” states won’t be able to maintain their current rates of growth, so growth throughout the national economy will in fact slow. The effect is likely to be more pronounced in the non-mining states as the bank sees growth here slowing to around 1% from 4% previously, while the mining states should experience a slowdown to 3.75% from 8.5% previously.
It is a decline in domestic spending growth that will contribute a large part of any slowdown, Evans estimating of the 4.0% slowdown required it will contribute 1.5% of any fall compared to 1.75% from weaker business spending and only 0.75% from a slowdown in the housing market, an amount far below previous slowdowns given the current housing deficit rather than a surplus as is more traditionally the case.
Overall national domestic demand growth is forecast to fall from 5.5% last year to only 2% in 2009, while consumer spending growth should decline from 4.8% to 2.8% in the same period. In the South East the fall is forecast to be from 4.3% to 2.4% and in the mining states to 3.2% from 6.5%.
A similar slowing is forecast in capital expenditure, the bank expecting a 6% contraction in equipment spending over the next six quarters, while non-residential work is tipped to begin to decline towards the end of this year. Infrastructure spending should remain solid given the number of large projects being undertaken and here the bank expects the resource states to fare better than their counterparts given two-thirds of projects planned are in these states.
For New South Wales the bank notes the growth outlook is for 2.5% in FY08 before a mild slowing to 2% in FY09, outcomes broadly in line with what has been achieved in recent years. While domestic demand should be strong in FY08 it will slow noticeably in FY09, while consumer spending business investment should both remain at moderate rather than strong levels.
Victoria should display similar trends with growth expected to moderate from 3.25% in FY08 to 3% in FY09, an outcome that would still be better than more recent years. An advantage for the state is its strong pipeline of non-residential work, though tighter lending standards may see some slowing in this area leading into next year in Westpac’s view.
While delivering choppy numbers the Queensland economy continues to grow strongly and this is expected to continue with FY09 growth of 4.25% to be up from an expected 3.75% this year. While housing activity should stabilise, government forecasts call for consumption to moderate slightly, but a re-acceleration in capex will help keep growth at relatively high levels. Also helping in Westpac’s view will be stimulatory fiscal settings.
Western Australia is finding its strong growth of recent years harder to maintain as conditions become more challenging, so growth is forecast to moderate from 7.5% this year to 6.25% in FY09 on the back of modest falls in consumption, investment and dwelling construction.
Also helping maintain growth is fiscal policy, as the budget surplus is allowing for higher levels of government spending and this is stimulating overall activity levels. As well, cuts to stamp duty and other tax cuts are providing a boost to consumers.
While still lagging the broader economy South Australian growth remains solid, while Westpac points to the start of a more expansionary fiscal policy as offering a further boost to the state’s economy overall. This should support economic growth of around 2.75% in FY09, down slightly from the forecast 3.75% this year but well up from FY06 levels.
Tasmania has enjoyed stronger than average growth for most of this decade and the trend is expected to continue in the bank’s view thanks to strong consumer spending, business investment and dwelling construction, while the higher level of construction work is lifting the state’s population and this is also contributing to the expectation of solid ongoing performance.